Midweek Freemium Briefing - 2/21/18
Read Time = 5 a$$-kicking minutes
ICYM THIS WEEK'S SUNDAY EDITION:
This past week, in “Misplaced Optimism in Retail: L. Brands - What the Holy F*#*?,” we discussed L. Brands Inc. ($LB) CEO Leslie Wexner and the bananas comments homeboy made in connection with retail strategy, disruption, and the future of brick-and-mortar, generally.
Other recent content:
Is That a Gun in Your Pocket or…? (Short #MAGA!!)(RE: Remington Outdoor Company)
What is a Department Store, Anyway? (Re: The Bon-Ton Stores)
AN A$$-KICKING MESSAGE FROM PETITION:
TL;DR – we’re adopting a subscription model. The specifics are below.
For over a year now, we have been discussing disruption from the vantage point of the disrupted. With each passing week, more and more of you became a part of the PETITION community and we couldn't be more appreciative of your kind feedback and engagement. You’ve told us that you’ve loved our informative, entertaining and irreverent take. Thank you.
For us to survive, however, we need to move on from Ramen noodles. We previously foreshadowed some coming changes. It’s time. We are moving from Mailchimp to Substack, a new startup with the mission of helping writers actually get paid to research/write. With Substack's help, PETITION will become a two-tier subscription situation.
You may have noticed a few weeks back that you started getting PETITION twice a week: the robust version you've come to know and love on Sunday, and a shorter version on Wednesday. We hope you've enjoyed the double dose.
To continue receiving the shorter Wednesday edition (our "Freemail") - that’s what you’re reading now btw - you don't need to do anything. Just sit there, bill hours, and inwardly pose existential questions. You'll be in our group of free riders...we mean, uh, "freemailers."
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News of the Week (3 Reads)
1. EB-5 Visas & Bankruptcy/Distress (Short Specialty Casinos)
Back in 1990, Congress created the EB-5 program to “stimulate the U.S. economy through job creation and capital investment by foreign investors.” We’ll spare you all of the glorious details but generally speaking, EB-5 investors must (i) invest in new commercial enterprises, (ii) create 10 full-time (35+ hours per week) positions for qualifying employees (e.g., US citizens, lawful permanent residents or other authorized immigrants), (iii) contribute a sufficient amount of capital, e.g., $1mm or, in an high-unemployment area or rural area, $500k. In exchange for the investment, EB-5 investors are eligible to become lawful permanent residents (read: “green card holders”). Because of the lower threshold, most EB-5 investors invest in the high unemployment or rural area. And about 80% of the total number of EB-5 investors come from South Korea, Taiwan, the UK, and China. The latter - the Chinese - are getting a nice taste of distressed debt these days.
On February 16, the Lucky Dragon Hotel & Casino LLC filed for bankruptcy in the District of Nevada - sparking all kinds of creative headlines:
If you think that’s bad, we guess we’re all lucky that the casino wasn’t named the “Flaming Dragon Hotel & Casino LLC.” We’d end up with all kinds of “Tropic Thunder” references.But we digress.
Opened in November 2016, the Lucky Dragon was supposed to be “an authentic Asian cultural and gaming experience.” The core target demographic consisted of the local Las Vegas Asian market - including the regional Asian populations of Los Angeles and San Francisco - as well as international Asian visitors from Mainland China, Taiwan and Canada.
While the project had theoretical appeal to a large swath of the Asian population, the Lucky Dragon also had $45mm in debt; it has to repay its construction loan ($30mm) and revolving loan ($15mm) to its secured creditor, Snow Covered Capital LLC (no, we didn’t make that name up). The hotel/casino also received $89,500,000 from Lucky Dragon LP, an investment vehicle housing the 179 individual EB-5 investments in the property. Snow Covered recorded a Notice of Default on the property to commence foreclosure back in September. Unable to find a buyer at a purchase price sufficient to pay off Snow Covered’s claims outside of court, the hotel/casino filed for bankruptcy to pursue “a quick auction, which will pay Snow Covered in full, provide fresh capital, and reenergize the project, such that it can become profitable and expand into full operation as quickly as possible.” The hotel/casino hopes that such an auction will give EB-5 investors “an opportunity to preserve their investments.” Yeeeeaaah.
The debtor is already facing opposition. Snow Covered is objecting to the use of its cash collateral - taking shots at the debtor’s valuation in the process - and claiming the filing was made in bad faith. A hearing on all of this action is later today, February 21.
We’d be remiss if we didn’t point out the active role that EB-5 investors play in the distressed sale of the SLS Las Vegas as well. In that case, EB-5 investors ponied up $400mm and have filed suit against the prospective buyer of the (distressed) property, Alex Meruelo. “The SLS continues to lose money, according to the November lawsuit filed on behalf of the Chinese debt holders.” The sale faces some hurdles; maybe SLS will (finally) end up in bankruptcy court after all…?
All of which is all to say that there may be an opportunity for some industrious lawyers seeking an untapped niche as the distressed EB-5 experts.
2. Walmart and Trucking Issues (Short Grocers)
Walmart Inc. ($WMT) reported earnings on Tuesday and promptly got battered in the market.
While the behemoth retailer’s comp sales numbers rose 2.6%, e-commerce demonstrated some considerable cooling and EPS missed by $0.04.
Take a close look at the company’s earnings and you see that gross margin shrank, “due primarily to price investments, higher transportation expense as a result of the higher volumes and fuel costs, and mix effects from our growing eCommerce business.” There’s a lot to unpack here. For now we’ll just focus on transportation costs.
The trucking industry is in a state of transition. With aging drivers, high licensing fees and increased regulation, the United States currently suffers from a shortage of drivers. Its a grueling life on the road and in an effort to make matters better for drivers, regulators instituted limits on the number of consecutive hours a driver is allowed to be on the road. Indeed, trucks are now equipped with ELDs or “electronic logging devices” to ensure that drivers adhere to rules. The ELDs have compounded the shortage problem. Considering that 70% of all freight is moved by truck - including produce and packaged goods - this shortage creates product shortages, delivery delays and higher prices. Given the ongoing grocery price wars, those costs are getting absorbed by companies rather than consumers (so far, anyway).
As you know, Walmart is a pretty damn big grocer. If, considering its scale, there are transportation troubles that it doesn’t have the leverage to work through (though it is trying with fines), imagine how some of the smaller grocers - say, Tops Market and Bi-Lo - are faring. Hmmm.
Why can’t trucking companies appeal to additional drivers? In addition to the brutal lifestyle, it probably doesn’t help that trucking is almost always atop the list of professions soon to be automated away. Query what happens in the gap period between now and full-on automation? More shortage-induced pain for retailers? Or will equilibrium strike?
3. Gibson Brands (Long #Dadjoke-infused Media Reports)
As we’ve previously discussed, the music industry is in a bit of flux. This week, news reports resurfaced that Gibson Brands, the manufacturer of guitars used by rock legends like Jimmy Page (“swan song”), Keith Richards and Justin Bieber (indeed, he plays the Gibson Hummingbird, but we just wanted to check to see if you were still paying attention), is struggling. The media had a bit of fun with it:
Here, Proactive Investors:
And here, AV Club:
And then there is Reuters which “jams” all kinds of stuff in:
Guitar puns. Ugggh.
We previously noted that Gibson Brands had received an extension of time to report its financials to its private equity overlord, GSO. Clearly those financials are out and literally every media outlet on the planet got a peek.
From what we could gather, both top and bottom lines suffered - the former down 22% and the latter down 45%. The company’s senior secured notes traded down a few points on the news; they mature this summer and there is a springing lien to the company’s GSO-dominated term loan if the notes aren’t taken or refinanced out. The biggest pain point appears to be the various “electronics” related businesses the company tacked on in recent years as musical instruments actually showed some EBITDA growth in the face of revenue decline. With revenue down across the board, however, the notes are of increasing concern. And the noteholders (led by KKR) are advisored up to negotiate a workout with the company. That is, if the company is of the view that there’s such a need.
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