💥Good Retail Numbers. Bad Malls.💥
CBL Takes Extraordinary Step; Destination Maternity is Effectively Dead
|Dec 4, 2019|| 2|
We hope you and yours enjoyed the holiday, endured the deluge of sales emails (including from us, sorry!), and got some much-needed rest and relaxation. For those in the restructuring industry, now is a time that calls for balance. Balance of (a) the gazillion holiday parties that take place this time of year and (b) potential case filings that look to fall smack dab in the middle of a planned vacation! Living. The. Dream. Keep your heads up though: bonuses are (hopefully) right around the corner!
We wanted to thank you all for being subscribers to PETITION. Sure, a good number of you neglected our discount offers and decided to continue free-loading but that’s fine: you like our content enough to not unsubscribe and perhaps, later down the road, you’ll join us either as an individual or a group Member.
For those of you who are Members, we’re going to strive to push more Members’-only content this year. In the new year, there’ll be more paywalled Wednesday content. Why? Because you support us and we want and need to reward you. We’re thankful for you. Cheers!
⚡️Update: CBL & Associates Properties ($CBL)⚡️
We did a deep dive into Tennessee-based CBL & Associates Properties ($CBL) back in March’s “Thanos Snaps, Retail Disappears👿” and, in the context of Destination Maternity’s bankruptcy filing, followed-up in an October update. To refresh your recollection, CBL is a real estate investment trust (REIT) that invests primarily in malls based in the southeastern and midwestern US. At the time of the aforementioned “Thanos” piece, the REIT’s stock was trading at $1.90/share; its ‘23 unsecured notes were priced around $80 and its ‘24 unsecured notes around $76. In case you haven’t noticed — all Black Friday ($7.4b in online sales, $2.9b via mobile ordering) and Cyber Monday (a record $9.2b) talk about gangbusters retail sales notwithstanding — the malls haven’t particularly fared much better since Q1. To put an exclamation point on this, early reports are that brick-and-mortar stores saw an overall 6% decline in sales over Black Friday.
When it reported Q3 earnings at the end of October, CBL’s numbers weren’t pretty. Revenue fell approximately $20mm YOY, net operating income declined 5.9% YOY, and same-center mall occupancy, while up on a quarter-by-quarter basis, was down 200 basis points YOY.
On Monday, the company announced that “it is suspending all future dividends on its common stock, 7.375% Series D Cumulative Redeemable Preferred Stock and 6.625% Series E Cumulative Redeemable Preferred Stock.” The company’s CEO, Stephen Lebovitz said:
“We anticipate a decline in net operating income in 2020 as a result of heightened retailer bankruptcies, restructurings and store closings in 2019. Offsetting these declines by retaining available cash is necessary to maintain the market dominant position of our properties and to reduce debt. CBL has also made significant efforts over the past 18 months to reduce operating costs, including executive compensation and overall corporate G&A expense, as well as execution of a strategy to utilize joint venture and other structures to reduce capital expenditures. Ultimately, we believe these actions will allow the Company to return greater value to its shareholders.”
Given the above, it’s worth revisiting the alleged benefit of REITs to investors. Among them are that:
post 1960, REITs provided small investors with an opportunity to benefit from commercial property rental streams; and
they are, typically, high dividend payers — considering that by law, they must distribute at least 90% of their taxable income to shareholders as dividends.
WOMP. WOMP. Not so much these days, it seems. But, we bet you’re asking: how can it terminate its dividend while maintaining its REIT status? From the company:
“The Company made this determination following a review of current taxable income projections for 2019 and 2020. The Company will review taxable income on a regular basis and take measures, if necessary, to ensure that it meets the minimum distribution requirements to maintain its status as a Real Estate Investment Trust (REIT).”
Umm, that doesn’t portend well. The answer is: it may not have “taxable income.” B.R.U.T.A.L.
How did the market react?
The stock market puked on the news. The stock was down 6% with a general market drawdown, but after-hours, upon the announcement, the stock gave up an additional ~30% on Monday and closed at $1.02/share on Tuesday:
Meanwhile, the preferred stock also obviously traded down (lots of Moms and Pops chasing yield, baby yield, getting burned here), and the ‘23 unsecured notes and the ‘24 unsecured notes, at the time of this writing, last sold at $72.75 and $64.1, respectively.
The GIF above says it all about this story. And, worse yet: it may get uglier.
⚡️Update: Destination Maternity Inc. ($DEST)⚡️
Speaking of ugly…
In the aforementioned October CBL update, we wrote:
The last thing CBL needed — on the heals of the downgrade — was near-instantaneous bad news. It got it this week.
Yesterday, the bankruptcy court granted interim approval authorizing Destination Maternity Corporation ($DEST) to assume a consulting agreement with Gordon Brothers Retail Partners LLC. Gordon Brothers will be tasked with multiple phases of store closures. Among those implicated? CBL, of course:
CBL is landlord to DEST on 16 properties that are slated for rejection. Considering that DEST cops to being party to above-market leases, this ought to result in a real economic hit to CBL as (a) it will lose a high-paying tenant, (b) it will take time to replace those boxes, and (c) it is highly unlikely to obtain tenants at as favorable rents.
Let’s pour one out for CBL, folks. The hits just keep on coming.
On Friday, Destination Maternity filed a motion seeking approval of a stalking horse bidder for its assets. In September’s “🤔Is it a "Destination" if Nobody Goes?🤔,” we concluded:
And so we’ll have to wait and see whether Greenhill can pull a rabbit out of their hats. Unfortunately, this is looking like another dour retail story. This looks like a liquidating ABL if we’ve ever seen one.
According to the motion, Greenhill dug deep. They reached out to over 180 potential buyers, executed 50 CAs, and granted due diligence access to nearly two dozen parties.* They also conducted 8 management presentations with potential bidders. If you’ve ever wondered why investment bankers make what they make, this ought to illustrate why: it can be a lot of work trying to garner interest and herd cats. Then again, they did accept a mandate where there was a questionable likelihood that the asset value would clear the debt. 🤔
Unfortunately, the result is not — as predicted — particularly stellar. To be clear, this isn’t a reflection upon Greenhill. This was a difficult assignment in a challenging retail environment: it’s a reflection of that.
And so Marquee Brands LLC** and a contractual joint venture between Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC (together, the “Agent”) entered into an asset purchase agreement (APA) with the debtors pursuant to which they will purchase “the Debtors’ e-commerce business, intellectual property, store-in-store operations, and the right to designate the sale of certain inventory and related assets” for an estimated $50mm (subject to adjustments). Repeat: an estimated $50mm. The Agent will liquidate the company’s inventory, fixtures and equipment and conduct store closing sales at the 235 stores where closing sales are not already in process. Said another way: the company’s retail footprint is going the way of the dodo. Clearly this isn’t credit positive for CBL and other landlords.
To refresh everyone’s recollection, here is what the company’s capital structure looked like at the time of its bankruptcy filing:
We previously noted when highlighting the aggressive milestones baked into Wells Fargo Bank’s consent to use its cash collateral:
Wells clearly wants this sucker off its books in 2019.
Rightfully so. The $50mm purchase price is subject to a $4mm holdback. In other words, the actual value transfer may be approximately $46mm. That puts the purchase price at riiiiiiiiiiiiight around Wells Fargo’s exposure. Its aggressive handling of the case appears to be warranted: this thing looks a hair away from administrative insolvency.
Apropos, the official committee for unsecured creditors — in a grasp for some sort of relevance here — filed a limited objection to the motion. The committee argued that the break-up fee (3.5%) and expense reimbursement (up to $750k) were unwarranted given the size of the bid and the lack of a going concern offer.
They were shot down. They did, however, wrestle some concessions. They apparently got the purchase price increased by $225k (in exchange for avoidance actions) and an additional $225k to be paid to 503(b)(9) admin claimants prior to Wells getting its money. A small victory but something for some creditors here.
And that ladies and gentlemen is what bankruptcy boils down to. Is there value? And if so, who gets it? Here, it’s hard to see any real winners. Not the company. Not Wells. Not CBL and the company’s other landlords. Not vendors. Or suppliers. Or employees. Or, really, even the professionals (for once). Time will tell whether Marquee can do something with this brand that makes it one of the rare winners. It’s not clear from the papers how much of the $50mm is attributable to them and, therefore, how much they’re putting at risk. Clearly nobody else was comfortable with the risk here. However you quantify it.
*At the time of filing, the numbers were 170 parties contacted and 34 executed CAs. So, there wasn’t much additional interest in the assets post-filing.
**Marquee Brands also owns BCBG which, itself, traversed the bankruptcy process not long ago.
😜Tweet of the Week😜
You know it’s true:
😎Notice of Appearance — Damian Schaible, Davis Polk😎
This week we welcome a notice of appearance from Damian Schaible, co-head of the Restructuring Group at Davis Polk & Wardwell LLP. Typically we ask our participants between four and six questions but we were particularly interested in Damian’s views on two critical topics:
PETITION: What are some themes in distressed/restructuring that deserve intensified focus in 2020?
The importance of being “at the table.” As a wise man once said, when there is no yield in the market, investors eat each other. In the past couple of years, non-pro rata transactions have become more and more frequent in restructurings. RSAs, rights offerings, DIPs, exit financings, preferred stock raises, private exchanges, open market repurchases, layering transactions, direct investments, the list goes on and on, and both the technology and the terms have continued to develop over the past few years. There are examples, of course, of courts and/or minority holders pushing back successfully, but the trend line has largely been in one direction, and the loose documents put in place over the past five years permit and encourage the transactions. Of course, the key to making sure you are “at the table” is size – a real premium is being put on larger check sizes and more sophisticated, early organization among holders.
And early organization among holders is increasingly required, as the sponsor community more broadly gets more and more comfortable taking aggressive reads and actions under their portfolio company debt documents. Historically, there was a belief that only a few sponsors would be willing to make the really aggressive moves to buy runway and get cheaper deleveraging, but that is changing. Lenders are now increasingly forced to not only underwrite a business and a collateral package but also whether that business and/or collateral package would still be there in a restructuring scenario. So you might say that while investors may be eating each other, sponsors are eating their lenders….?
PETITION: What else?
CLOs playing an increasingly important role in restructurings. CLOs raised and deployed never-before-seen amounts of capital in recent years; and because the CLOs are no longer just selling early, as debt comes under pressure, terms of restructurings are being molded by the fund requirements of many CLOs. Equitizing is not always the preferred option, and there is more and more pushback on rights offerings and other equity raises. Governance is also getting more complicated. However, significant risk remains for CLOs that end up in restructurings driven by larger hedge fund holders: disfavored transactions and capital raises can lead to real value destruction for, and forced selling by, CLO holders. And while CLOs are sticking with troubled names longer, they still have fund limitations that may well start to kick in en masse in 2020. As CLOs push up against their basket capacity for B3/CCC-rated debt, they will start trapping cash, cutting distributions and be forced to start selling. Given the huge numbers of distressed issues dominated by CLO holders, forced selling could potentially cause real volatility in the market with little warning.
PETITION: We noted this theme in an October Members’-only deep dive entitled,💥CLO NO!?!?💥, with a short follow-up in “😬We Have Our Answer😬.” We’re 100% sure that CLO dynamics will continue to be a huge factor in restructurings going forward.
PETITION: Anyway, is that all Damian? Sheesh: have some thoughts on something, will you?? Any other topics?
Increasingly complicated post-reorg governance. Given the trends above, and the bloodbath that has been post-reorg equity over the past couple of years, governance negotiations have become increasingly complicated and at times adversarial. Minority holders seek information rights, liquidity and general protection from larger holders. Larger holders generally seek the opposite in order to limit post-reorg volatility as smaller holders buy and sell. Also, more frequent voting constructs to address regulatory and foreign holder issues skew governance and require twists and turns and heavy negotiation. When you put all of this together, it makes corporate lawyers’ heads spin!
PETITION: Thanks for that. Now, more critically: you’re always good for some crazy holiday gift recommendations. What are your top picks this year?
As you might expect from a guy who has spent most of the last five years representing creditors in oil & gas and coal restructurings, I am a big fan of electric vehicles. I drive an electric car, and I have a fleet of electric scooters and go karts, you know, for my kids….
The Razor Crazy Cart XL – super fun, skidding and sliding go kart. One key design flaw makes it even more adventurous – believe it or not, there are no brakes….
Segway Ninebot Go Kart – my personal favorite, it’s fast, it handles very well and it runs forever on a charge.
Ninebot Kickscooter Max – new this year, this thing is really fast, very maneuverable and a lot of fun.
And to mix it up for those who don’t live in the suburbs with copious garage space, I love this smoking box for cocktails. Adds a terrific smoky flavor to bourbon cocktails and also adds an air of sophistication for otherwise low brow restructuring professionals….
PETITION: Ha. And low brow newsletter authors!! Cheers!
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
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