💥Is Big Lots in BIG Trouble? Part III.💥
Also: Li-Cycle Holdings Corp ($LICY) and 2U Inc. ($TWOU).
We previously covered Big Lots Inc. ($BIG) here…
…and here:
In the latter piece, we concluded:
Good news is fourth quarter spending season is here. The company better hope its customers spend BIG bucks. 🙄
So did customers spend? Did the company’s recent earnings deliver? Did the company salvage a disastrous ’23?
Net sales continued to plunge: down 7.2% YoY. Comparable sales were even worse, dropping 8.6% YoY. Adjusted SG&A as a percentage of revenue increased to 39.1% in 4Q’23 vs 34.3% in 4Q’22. Adjusted EBITDA came in positive for the holiday season but was still down 11.3% from the year prior. And to top it all off, while OCF was $147.1mm for the quarter, full year ‘23 OCF came in at negative $252mm. So, again, no, the holiday season did not save the disastrous year of ‘23.
The stock responded in kind…
…and has continued its dissent this week:
Clearly the market is not biting on the “sequential improvement” spin fest:
To be fair, the quarter did have the lowest comparable sales decline since FY’21 and working capital is getting better…
…but we are very much reaching for something positive to say.
The question is at what level does this business stabilize? Can the planned cost savings (~$200mm) plug further operating losses (~$200mm in negative EBITDA for FY’23)? And if not, what kind of financing opportunities are available to bolster liquidity outside of the company’s $900mm revolver (of which $533mm was outstanding as of 3Q’23)?
Given a lot of uncertainty around this name, we’ll simply repeat ourselves: the company better hope its customers spend BIG bucks in ‘24. 🙄
⏩One to Watch: Li-Cycle Holdings Corp ($LICY)⏩
Founded in ‘16, Li-Cycle Holdings Corp ($LICY) is a Canada-based company that recycles lithium-ion batteries, a type of rechargeable battery widely used in electronic devices and electric vehicles. When these batteries become old or are no longer usable, Li-Cycle takes them apart and “recovers” materials inside that still hold value. They can then sell these materials back to different parties for use in, among other things, new batteries (hence the “recycling”). This process reduces the need to go back and drill into the earth and is thought to be more environmentally friendly.
The company IPO’d via SPAC in Feb ‘21 at a valuation of $1.67b and, as is customary for SPACs, an initial share price of $10/share. The SPAC was under the name Peridot Acquisition Corp. Peridot’s sponsor was an affiliate of Carnelian Energy Capital Management and provided $300mm, with the rest coming in the form of a PIPE from Neuberger Berman, Franklin Templeton, and Traxys.
In total, the offering raised approximately $615mm in funding, which was to be used to build additional recycling facilities. Development at one of those planned facilities isn’t quite going according to plan. The facility, the Rochester Hub, is expected to process up to 35k tonnes of black mass per year, making it one of the largest facilities in North America. Yet, after investing nearly $400mm into the project, the company recently announced that it is pausing construction. Investors have been anticipating this announcement for a while as the project has been delayed numerous times. See the stock price over the past year ⬇️:
The company outlined the capital needed to complete the Rochester Hub project in its last earnings call. The revised project costs range from $850mm to $1b. As of November 10, 2023, the company has a cash balance of roughly $100mm. CFO Deborah Keenan Simpson stated the obvious when she indicated that $100mm will not be enough money to get the Hub done, and she anticipates raising additional funding before restarting the Rochester Hub project. The company has been expecting $375mm in financing from the US Department of Energy since Feb ‘23, though it still needs to satisfy conditions to receive the proceeds.
For a company that is far from profitable (-$130mm in earnings this quarter, down from -$27mm YoY), the Rochester Hub was supposed to be the saving grace that turned it around. In an interview with a local Rochester news station, CEO Ajay Kochhar said, “The real unlock is the hub and so everything we’ve been doing is in preparation.” Later in the interview, Kochhar stated that there isn’t really a timetable for completion at the moment. So, to quit burning through cash the company decided to halt construction until additional funding could be obtained. The company engaged Moelis & Company LLC ($MC) to shake some couch cushions.
The company has $282.8mm of convertible debt outstanding as of the 3Q filing. This convertible debt is comprised of KSP Convertible Notes ($97.5mm) and Glencore Convertible Notes ($185.3mm). The KSP Convertible Notes are set to mature in Sep. ‘26 and can be paid PIK or cash (S+5 for cash; S+6 for PIK). The conversion price for the KSP Convertible Notes is $13.43/sh. The Glencore Convertible Notes mature in May ‘27 and can also be paid in PIK or cash (S+5 for cash; S+6 for PIK); they have a conversion price of $9.95/sh. Note, again, the current stock price.
On Dec. 6th, Glencore, a diversified natural resource marketer and producer, released an update on its investment in the unsecured convertible debt. Glencore stated that it would hold ~11.3% of the outstanding common shares if they elected to convert the entire principal amount. Glencore also mentioned that they are aware of Li-Cycle’s problems and are actively in discussions with management. Li-Cycle responded to Glencore’s statement by saying “no comment” and that it is continuing to pursue financial and strategic alternatives with Moelis.
Since then? Well … some negative signs. The filing of the company’s 10-K is delayed and is now anticipated on March 15, 2024.
But SEC compliance is the least of the company’s concerns. Per the Rochester Business Journal, the company felt compelled to sue the construction management firm running the Rochester Hub project for, among other things, breach of contract. The company claims that the construction firm failed to secure timely financing, leading to a change of the lease documents. In response, the construction company is blaming Li Cycle, saying that the company made it impossible to obtain financing. Per RBJ:
But Pike Conductor DEV 1 contends in a default notice sent to Li-Cycle that the recycler’s Oct. 23 decision to pause construction on the Rochester Hub made it impossible to finalize financing and, as such, ended up triggering a default by Li-Cycle.
Given all of this it doesn’t sound like the company’s saving grace Rochester Hub is coming online anytime soon.
But — ⚡️BUT⚡️ — it’s not all bad news. On March 12, 2024 (yesterday), the company announced a step in the right direction — issuance of a $75mm senior secured convertible note to … wait for it … Glencore! Does this solve the Rochester problem? Hard no. But does it buy the company some additional time? Absolutely. The statements in connection with the new financing are telling:
In other words, Moelis still has its work cut out for it.
What are the terms of this new financing? Per the announcement:
The Note will mature on the fifth anniversary of closing and will be convertible into common shares of the Company at an initial conversion price of $0.53 per Li-Cycle common share. Li-Cycle will be entitled, at its election, to pay interest on the Note in cash or in-kind ("PIK"). Cash interest payments will be based on the Secured Overnight Financing Rate ("SOFR") plus 5.0% per year, and PIK payments will be based on SOFR plus 6.0% per year.
So, yeah, the same interest terms as the prior unsecured (busted) convertible note. Yet, secured!
In addition, certain of Li-Cycle’s subsidiaries organized in Canada, the United States, Switzerland and Germany have agreed to guarantee the Company’s obligations under the Note and provide security interests on substantially all of their assets (in the case of the U.S. and Canadian subsidiaries) and certain specified assets (in the case of the German and Swiss subsidiaries). The Note will also be subject to certain reporting and affirmative and negative operational covenants, including, but not limited to, limitations on the incurrence of indebtedness, the granting of liens, the disposition of assets and the making of investments, dividends, distributions and payments of junior debt.
That’s not all. In connection with the new financing, the company and Glencore agreed to amend and extend the existing convertible notes, with such modifications triggered by the earlier of certain Rochester-related milestones or a drop dead date. The conversion price, the maturity, and the security are all primed to change under the arrangement. Glencore also gets to place additional members to the company’s board of directors.
The company was represented by Freshfields Bruckhaus Deringer LLP in the transaction while Glencore had Weil Gotshal & Manges LLP as counsel.
⏩One to Watch: 2U Inc. ($TWOU). Part III.⏩
We previously visited with 2U Inc. ($TWOU) — a Maryland-based online educational platform that partners with universities to offer courses, boot camps, and other credentials to students worldwide — twice before here…
…and here:
It’s been less than a month and the stock and $380mm of 2.25% senior convertible notes due in ‘25 are basically pricing where they were at the time of our last piece on this sh*tco debtor company. So, why the update?
We noted in that last piece that “…the company expects a going concern qualification on account of the ‘26 [$377mm secured first-lien] term loan.” Well, 👏🏼 team, you finally earned it!
The MD-based online education platform filed its much-anticipated 10-K on March 6, 2024 and there it was! The good ol’ GCW regarding its 25s. The 25s have an outstanding balance of $372mm and mature in May ‘25; they are, however, subject to a springing maturity of Jan. ‘25 if more than $40mm remains outstanding. With just $73mm in liquidity and little to no operational cash coming into the business, we might as well just ignore May and keep our focus on January from this point forward.
Wait, there’s more.
In connection with the going concern warning, the company pointed out the $900mm minimum recurring revenue covenant baked in its credit agreement. After seeing results for FY’23, this is getting tighter. Revenue for the past three quarters has been $222mm, $229mm, and $255mm, meaning they would need roughly $194mm of revenue in 1Q’24 to be above the minimum. The company lowered its ‘24 revenue guidance to $805 - $815mm and guided to $195-198mm for the quarter. Management will have to hit the guide.
The 25s currently price around ~45c, an incremental uptick from when we last wrote about them. The term loan sits around 95c and the company’s ‘30 Convertible Notes with ~$150mm outstanding price around 35c. And the stock continues to sh*t the bed:
We’re gonna keep studying this one.
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