Jamie Dimon, The Bon-Ton Stores, Fraudulent Mofos
|Apr 11, 2018||Public post|
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Midweek Freemium Briefing - 4/11/18
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In our Members’-only Sunday briefing “Peace Out Nine West” we took an a$$-kicking deep dive into the Nine West Holdings LLC bankruptcy, the “Amazon Effect” (and why it needs to go the eff away), the credit cycle, President Trump’s reaction to the FirstEnergy bankruptcy and much much more. Did you miss it? Become a Member by clicking on that little blue button below.
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Notable News (2 Reads) - Sponsored by Gavin/Solmonese
1. What to Make of the Credit Cycle (Part 2)
In Sunday’s “What to Make of the Credit Cycle (Part 1),” we noted various takes on the credit cycle by Moody’s, Fitch, Guggenheim Partners and Frank K. Martin. In his letter to shareholders, JPMorgan ($JPM) CEO Jamie Dimon chimes in and offers a similar conclusion to that of Guggenheim Partners’ Scott Minerd. That is: there’s a good chance that interest rates will go up faster than expected. And that will have ramifications. Here’s what he had to say,
“Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal. We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets. A simple scenario under which this could happen is if inflation and wages grow more than people expect. I believe that many people underestimate the possibility of higher inflation and wages, which means they might be underestimating the chance that the Federal Reserve may have to raise rates faster than we all think.”
“If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect. As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.”
There’s a whole industry of restructuring professionals…gulp…hoping that he’s correct. There are a number of funds raising cash right now hoping that he’s correct.
Still, it’s a question of how much how fast. Wells Fargo yesterday indicated that a 300 bps increase in LIBOR would not immediately pressure most issuer’s capital structures. Also:
2. Religionless Millennials + Private Equity = Short David’s Bridal Inc.
In the past 10 years, the share of U.S. adults living without a spouse or partner has climbed to 42%, up from 39% in 2007, when the Census Bureau began collecting detailed data on cohabitation.
Two important demographic trends have influenced this phenomenon. The share of adults who are married has fallen, while the share living with a romantic partner has grown. However, the increase in cohabitation has not been large enough to offset the decline in marriage, giving way to the rise in the number of “unpartnered” Americans.
Maybe the rise in co-habitation among romantic partners and the decline in marriage has something to do with the decline of importance of religion. Note this chart:
That said, the decline seems to have more to do with millennial attitudes towards religion AND the institution of marriage than anything else.
What does this have to do with any of you? Well, it seems that attitudes towards marriage are creating some retail distress. In June, Alfred Angelo filed for chapter 7 bankruptcy — much to the chagrin of countless brides-to-be who were left uncertain as to the delivery status of their ordered gowns. Take cover…insert peak Bridezilla.
David’s Bridal Inc. swooped in and tried to save the day. Because HOT DAMN retail is cold today. Customer acquisition needs to come from somewhere. And David’s Bridal needs all the help it can get.
The Conshohocken Pennyslvania-based retailer is the largest American bridal-store chain, specializing in wedding dresses, prom gowns, and other formal wear. The company has approximately 300 stores nationally (and declining). It also has approximately $1 billion of debt hanging over its balance sheet like an albatross. Upon information and belief (because the company is private), the capital structure includes a $125 million revolving credit facility, an approximately $500 million term loan due October 2019, and $270 million of unsecured notes due October 2020. The notes are trading at roughly half of par value, reflecting distress and a negative outlook on the possibility of full payment. Justifiably so. With EBITDA at roughly $19 million a quarter, the company appears 9.5x+ leveraged. And you thought YOUR wedding dress was expensive.
Why so much debt you ask? Well, c’mon now. Surely you’ve been reading us long enough to know the answer: private equity, of course. The company was taken private in a 2012 leveraged buyout by Clayton, Dubilier & Rice. (Petition Note: Callback to that Law360 article where private equity lawyers and bankers alleged that PE firms take too much flack…HAHAHA).
In light of recent trends and the debt, Moody’s recently downgraded David’s Bridal to “negative,” noting:
"‘In our view, this is a reflection of the intense competition in the sector and casualization of both gowns and bridesmaids dresses," Raya Sokolyanska, a Moody's analyst, wrote in a note to investors.”
Consequently, Reuters reported that the company is in talks with Evercore ($EVR) to help it address its balance sheet. If hired, we think it would be hilarious if Evercore included this Marketwatch article entitled, “5 brides share their financial wedding regrets” in its pitch to lenders. Choice bit,
“Clare Redway, a marketing director based in Brooklyn who married in June 2016 said she wishes she spent more on the wedding dress, or at least found a more unique one. ‘I just got mine on sale at David’s Bridal,’ she said.”
That ought to stir up some concessions.
PETITION: What is one notable trend you expect to see in ’18 that not enough people are talking about?
The fallout from the effects of the collapse of trust. When even the auditors of the auditors’ audits are cheating (see DoJ’s press release of January 23, 2018, announcing the arrest of several former partners of a Big Four CPA Firm, accused of hiring PCAOB staff to provide confidential regulatory information to help the Firm improve its audit inspection results), you know we’re headed for a disaster of biblical proportions: fire and brimstone, rivers and seas boiling, forty years of darkness, human sacrifice, dogs and cats living together…mass hysteria.
There has been a rash of thematically-on-point news on this front in the past week.
“The two largest proxy-advisory firms are recommending that General Electric Co. fire KPMG LLP as its auditor after 109 years, in light of accounting issues at the industrial giant.”
“The Federal Deposit Insurance Corp. could collect the largest damage award ever against a global public accounting firm when a federal judge decides what to award the agency after a verdict against PricewaterhouseCoopers.”
“But in the last 10 days, the shares have fallen about 80%. There were several triggers: A number of prominent short sellers made public attacks on Longfin; the company’s shares were added and then days later removed from the Russell 2000 Index; and on Monday the company said the SEC was conducting an investigation called In the Matter of Trading in the Securities of Longfin, which hasn’t resulted in any conclusions.”
“Michael Liberty advertised that Mozido, the start-up he founded which once boasted a valuation of $5.6 billion, would revolutionize mobile payments and bring financial services to 2 billion unbanked adults worldwide. But securities regulators claim Liberty hyped up Mozido while raising $55 million that mostly went into his own pocket.
The Securities & Exchange Commission has sued Liberty for fraud in federal court in Maine, saying Liberty stole most of the $55 million he purportedly raised for Mozido from 200 individual investors.”
“Blood-testing firm Theranos Inc. laid off most of its remaining workforce in a last-ditch effort to preserve cash and avert bankruptcy for a few more months, according to people familiar with the matter.”
Once its cash falls under that threshold, the terms of the Fortress loan agreement allow the New York private-equity firm to seize the company’s assets and to liquidate them, she said.”
What exactly did Fortress Investment Group LLC lend Theranos $100 million against? Is there even IP here? The blood testing tech was a fraud; the Zika test isn’t working. What gives here?
At least Ms. Holmes has been focused on “burn rate” and conserving cash with an eye towards giving the Zika trials a fighting chance:
“Until Tuesday, Ms. Holmes still had two personal assistants and two security guards who drove her around in a black Cadillac Escalade SUV, according to the people familiar with the matter.”
What. The. F*ck.
We are sure that there will be at least a handful of high profile fraud-based bankruptcies that emerge in due time. Mark our words: 60% of the time it happens every time.
⚡️A Quick Update⚡️
On Monday, The Bon-Ton Stores filed a motion seeking permission to pay a $500k diligence fee to a combination of DW Partners, Namdar Realty Group, Washington Prime Group Inc. ($WPG) and AM Retail Group Inc. in connection with a signed letter of intent to purchase the company’s assets. The former three firms would seek to own all of Bon-Ton’s assets other than a distribution center, which would go to AM Retail. The company also postponed its sale auction to April 16. The purchase price is:
“…no less than (i) an aggregate purchase consideration sufficient to have a minimum excess availability of 22.5% at closing; and (ii) a minimum aggregate cash payment of no less than $128,000,000.00 (the “Baseline Bid”), a sufficient portion of which shall be funded into an escrow account to pay fees and expenses (including professional fees) associated with the wind-down of the Debtors’ estates after the Closing.”
In filing the motion, the Debtors champion that this bid is the only bid it received by its bid deadline that would allow for the Debtors to continue to operate as a going concern rather than liquidate; it is the only bid that would have the effect of:
“saving over 20,000 jobs and preserving a 120-year-old business that is a significant customer for its vendors, an anchor tenant for many of its landlords, and the leading hometown department store for millions of consumers in local communities throughout twenty-three (23) states.”
This will, no doubt, be a controversial course of action as certain creditors have been pursuing liquidation since the petition date.
Four things of note:
1. The minimum cash consideration offered — the $128mm — is INCLUSIVE of professional fees to fund the wind-down of the case. With only one Operating Report on file with no professional fees paid to date, it’s unclear how much of that consideration will actually inure to the benefit of the estate.
2. The offer is contingent upon a “[d]emonstrable commitment…by a substantial number of the Debtors’ existing landlords and trade vendors…to support the Company’s liquidity needs at close and through a period of no less than one year from the closing date….” In other words, this is very much pay-to-play: if landlords and vendors want to benefit from Bon-Ton remaining a going concern, they have to agree, upfront and for one year, to engage in rent and receivables forgiveness. What do they do? This is the quintessential “cutting off the nose to spite the face” dilemma.
3. The Official Committee of Unsecured Creditors filed a “Statement” last night supporting the proposed diligence fee; it analogizes this case to Aeropostale and notes how the work fee there helped encourage a going concern transaction. It said the diligence fee and a going concern offer “…is the last and only hope to save Bon-Ton from the fate of so many retailers that have filed for bankruptcy during this ‘retail apocalypse.’” Dark and stormy. We dig it.
“If they were to lose Bon-Ton as a tenant, cap rates for their malls would likely widen if given the risk of co-tenancy and capex requirements to redevelop.
But it could also be somewhat of an offensive move. It's possible that the landlords could place Bon-Ton stores in malls where they have a big box vacancy.
’We can't help but think this would be a competitive advantage for these two mall landlords relative to their peers,’ the two analysts said. ‘First, they could choose to keep open stores at their properties while closing others at competing locations. Second, it could provide them an opportunity to buy malls from their competitors at more attractive valuations if there is a risk of losing a major tenant.’”
This is retail today, ladies and gentlemen.
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If you ask someone how they're doing and they reply "livin the dream" there's a 95% chance they're crying on the insideApril 6, 2018