💥Another Retailer Bites the Dust💥

Stock+Field, Peabody Energy Corp., NYC Chains, & Neiman Marcus Feedback

🚜New Chapter 11 Bankruptcy Filing - Tea Olive I LLC (d/b/a Stock+Field)🚜

The #retailapocalypse is indiscriminate. Sometimes it likes to take down big prey like J.C. Penney or J. Crew but other times it just wants to take the path of least resistance and snag some low hanging fruit. That means that a number of retailers those of us in our bubbles in major coastal cities have maybe never heard of will find their way into a bankruptcy court. And a bankruptcy court outside of Delaware or Texas no less. Like, say, the District of Minnesota.

Take Tea Olive I LLC (d/b/a Stock+Field) for instance. The Minnesota-based “farm, home and outdoor retailer” operates 25 stores across the mid-West. It only sells “a small amount of products…online.” While that’s obviously pretty lame in this day and age (they were practically asking for it), this place seems like a smorgasbord of fun: in one fell swoop you can go in and pick up, among other things, some dog food, a kayak, some beekeeping equipment, some lawn fertilizer, workwear and apparel, a grill, paint, a new HVAC unit, auto parts, food, toys and firearms! A Christmas bonanza, this place must be! Earl Jr. can get himself a little toy gun while Big Earl can get himself a grenade launcher and AR-15. Everybody wins!

Well, not everybody. Unfortunately, the place is liquidating in bankruptcy, a sad post-holidays result for the 1,000 full and part-time employees that work there.

In 2018, the debtor did $176mm of revenue and adjusted EBITDA of $5.1mm. In 2019, to differentiate itself from other unrelated “Big R” entities in the US, the debtor changed its name from “Big R Stores” to “Stock+Field” expecting some short-term drops in performance but expecting those drops to be mere blips on the road to a stronger future. And, in fact, the company did suffer a small drop in performance: it did $173.9mm in revenue and $1.6mm in adjusted EBITDA. With that small hiccup out of the way, 2020 was supposed to be the year.

Spoiler alert: it wasn’t. Per the company:

In the beginning of 2020, the Debtor continued its rebranding efforts and expected the business to grow throughout the year. However, the Covid-19 pandemic unexpectedly upset all expectations for 2020. All of the Debtor’s 25 stores were open under strict capacity and operating hour restrictions due to the pandemic. Additionally, the pandemic itself has altered the shopping behaviors of the Debtor’s consumers, with some customers not feeling comfortable entering physical stores to shop. While the Debtor sells some products online, the majority of its products are sold solely in stores.

😬Apparently they didn’t get the omni-channel memo. For fiscal year 2020, therefore, the debtor estimates $141.5mm in revenue and -$2.2mm in adjusted EBITDA. Consequently, the company hired restructuring professionals to pursue a financing options and/or a sale. But had no luck. The company then hired Tiger Capital Group to pursue liquidation. Get ready for…

The debtor owes $29.7mm to its senior secured lender, CIT Northbridge Credit LLC pursuant to a credit agreement entered into in early March 2020. Query how seriously the various parties were taking COVID-19 given the timing. Still, the debtor estimates its inventory value to be $45.6mm and it also has $734k of A/R and prepaid assets against $26.5mm in trade debt (inclusive of approximately $1mm in 503(b)(9) claims).* The size of general unsecured creditor recoveries — certain to be less than 100% — will definitely depend on whether there are shoppers out there who are willing to risk contracting COVID-19 simply to hit the bid on that alleged $45.6mm in inventory value.

One question that also arises with retail cases is what happens with gift cards? It appears the debtor intends to honor outstanding gift cards until February 8, 2021. Hurry out, y’all, and get yourself some new toys and firearms just in time for next week’s civil war.

*For the uninitiated, the Bankruptcy Code provides that suppliers of goods delivered to a debtor in the ordinary course of business in the 20 days prior to a petition date be allowed as administrative expenses.

⚫️What’s Up With Coal? (Short #MAGA, Long Real Projections)⚫️

We haven’t covered Peabody Inc ($BTU) in depth yet because, frankly, there was quite a bit of coal activity in Q420 and we didn’t want to belabor the point: everyone knows that coal is struggling. Peabody Inc., despite having gone through a complex restructuring five years ago, isn’t an exception. In the lead-up to the holidays, multiple creditor groups rallied and proposals flew left and right. Then, on Christmas Eve, the company announced a transaction support agreement and exchange offer “…with 100 percent of its revolving lenders and letter of credit issuers and approximately 65 percent of its 6.000% senior secured notes due 2022 that contemplates a comprehensive financing solution to extend certain of Peabody's debt maturities and grant financial covenant relief, while maintaining sufficient operating liquidity and financial flexibility.” The exchange transaction envisions swapping the 6% ‘22s for 8.5% ‘24s. The upshot?

Following a successful closing of the exchange offer, Peabody's pro forma capital structure would include $1.52 billion of funded debt and a $324 million letter of credit facility.

That said, we were curious to see how the company has performed relative to projections and, surprisingly, it was actually within range. To a point. Take a gander ⬇️:

In case reading charts isn’t your thing, here are a few takeaways:

  • FY17 was obviously a hot mess with the Powder River Basin and Midwestern US regions dramatically underperforming. Similarly, Australia surprised to the downside. The difference between actual tons sold and projected tons sold was -21%.

  • FY18, however, saw things rebound nearly across the board with total actual tons sold missing projections barely (-5%). The Powder River Basin rebounded nicely. So did Australia.

  • With the exception of thermal performance in Australia, things fell off a cliff in FY19 in terms of tons sold.

  • Still, revenues and margins exceeded expectations in all three years.

  • The last year or so, however, has been rough. Operating profit got smoked in FY19 and that carried over into FY20. Hence the creditor agitation.

The company’s stock performance tracks well to these trends — something that ought to go without saying, generally, but these are special times we’re in. After all, despite a raging pandemic, the S&P 500 trades at historically high levels at roughly 25x. Nothing to see here. 🤷‍♀️

The company’s post-bankruptcy high was $42.61/share. Those players who got equity via the rights offering could have made a killing if they got out around then.

In any event, the stock popped 44% on the exchange announcement…

…and continued its upward trajectory since:

Similarly, its debt prices responded favorably.

The company’s term loan B was last week’s biggest winner, up 23.6% to 46 cents on the dollar.

The upshot then? Well, first, this is one of those rare examples where bankruptcy projections actually turned out to be kinda real. Second, it doesn’t look like BTU will add itself to the bankruptcy bin anytime soon — a rare escape from the sheer destruction that’s overtaken the coal industry the last few years.


⛓Notable: What We're Reading (8 Reads)⛓

1. Malls (Long WFO). Some are betting the WFH trend won’t last forever. How else do you explain Epic Games picking up a deserted North Carolinian mall on the cheap? Something tells us there might be some experiential uses in this space in the near future.

2. Medical Care (Long Arbitration?). Your constitutional rights relinquished to private equity.

3. New York (Short CRE). “More than 1,000 chain stores across New York City—or a little less than one out of every seven chains that were open this time last year—have closed their doors over the past twelve months, underscoring the immense difficulties facing retail businesses large and small during the pandemic. Overall, the number of chain stores in New York City declined by 13.3 percent—with 2.0 percent closing temporarily and 11.3 percent not indicating whether the closures are permanent or temporary. This is by far the largest year-over-year decline in chain stores since the Center for an Urban Future began our annual analysis of the city’s national retailers thirteen years ago, eclipsing last year’s 3.7 percent drop and the 0.3 percent decline in 2018.” Among many of the chains subsumed in these staggering figures are a number of bankrupted companies, including GNC, Modell’s, Papyrus and New York Sports Club. The notion that there’s a Starbucks on every corner in NYC may need to be revisited: the company closed 49 stores. Read the analysis here and not that there are caveats: some of the closures may only be “temporary.”

4. Oil (Short Small Producers). Fitch Ratings predicts that oil and gas defaults will lead the way in 2021 with approximately $15-18b of high-yield bonds in play. Query whether this view is subject at all to Saudi Arabia’s recent decision to curb production (and the subsequent rise in oil prices). Some possible victims include Gran Tierra Energy Inc. ($GTE) and Northern Oil and Gas Inc. ($NOG).

5. OnlyFans (Long Porn). There’s lots of talk about the “creator economy” which, not to get too meta, we’re obviously a part of with this newsletter but this puts the whole thing in an entirely different light.

6. Retail (Long “A Love Triangle”). This is a great thread about Simon Property Group ($SPG), Authentic Brands Group and BlackRock.

7. Retail Reopening (Long “What is Dead May Never Die”). Rue21 plans to take advantage of distressed commercial real estate rates and open 15 new stores. Speaking of death, there’s always Sears.

8. Tesla (Long Michael Burry, Short Elon Musk?). That’s precisely what Burry started doing in December.


⚡️Feedback: Neiman Marcus, Jay Alix v. McKinsey & by Chloe⚡️

With respect to December 23rd’s “🔥Our "Matter of the Year"🔥,” wherein we (i) gave Neiman Marcus our prestigious honor and (ii) described the settlement hearing during which Judge David Jones harangued Daniel Kamensky, one investor wrote:

“That public excoriation is so mean spirited and really upsetting. At a certain point, the distressed community needs to begin thinking long and hard whether to continue filing cases down there, even potentially forgoing the benefits of its venue. This isn’t the first time and won’t be the last where he’s just so over the top unnecessarily. It’s just grade school mean and condescension.”

Meanwhile, a financial advisor flagged this Institutional Investor article from December 23rd highlighting a recent entry in the ongoing Jay Alix vs. McKinsey saga before Judge Jones. The upshot? In a settlement with the United States Trustee, McKinsey agreed to withdrawal its retention application (with prejudice) in the Westmoreland Coal bankruptcy proceeding, forgoing $8mm in fees. Jay Alix declared victory. In a “limited objection” to the settlement, Mr. Alix said:

The Proposed Settlement is an important milestone in Mar-Bow’s years-long effort to ensure the integrity, transparency and fairness of the bankruptcy system and to drag McKinsey—kicking and screaming—into compliance with the law. By seeking to withdraw its application without fees, McKinsey recognizes that a bankruptcy professional who violates the disclosure laws cannot profit from its misconduct.

And yet, it was, in fact, a limited objection. Mr. Alix wrote (with apologies for the long block quote):

The Proposed Settlement essentially consists of two parts. The first entails McKinsey withdrawing its application for employment with prejudice and without fees. That is an important and critical step, and Mar-Bow fully supports it. The second aspect of the Proposed Settlement involves McKinsey’s pledge to comply with the law going forward. It is in that respect that the Proposed Settlement falls woefully short. The language promising future legal compliance is far too vague and utterly devoid of specific requirements and protections. It provides no assurance, let alone an enforceable assurance, that McKinsey will abandon its decades-long effort to exempt itself from the requirements of Bankruptcy Rule 2014. It also allows McKinsey to avoid the reckoning of a detailed opinion that this Court has suggested it may write at the close of this case, and leaves unanswered numerous important issues concerning McKinsey’s disclosure practices. The Court gave McKinsey numerous opportunities to withdraw before massive amounts of time and resources were expended on a trial. It should not countenance McKinsey’s vexatious about-face and the prejudice to the public interest that would be caused by allowing McKinsey to withdraw at this late stage of the proceeding, avoiding an adverse ruling in this Court only to continue flouting the bankruptcy rules in the future.

And this is where Judge Jones comes in. His honor appears to whip up his clichè machine, churning sweet butter like his “it’s not a threat, it’s a promise” line at every turn. Here he was in April 2019 dropping that puncher (in addition to some others like “If we really want to try and have a contest as to who’s got the biggest set, I promise you I will win that battle,” and now he’s at it again here. Per Institutional Investor:

…Judge Jones said he couldn’t go further than the settlement before him, despite his lingering concerns. 

“I can’t undo all the things I’ve heard,” he said, adding that he would continue to be “bothered by things I’ve heard” and called the resolution “unsatisfying.”

Judge Jones, too, seemed to think it might not be the end.

“It is my hope that McKinsey management is able to implement changes that make a difference. I don’t ever want to do this again,” he said.

Since many bankruptcy cases get filed in the Southern District of Texas, he warned, “If it happens again, it will come back to me…And I will finish what got started…that’s not intended to be a threat…it’s a promise.”

Just once we’d love to hear someone respond, “It ain’t a promise without a ring” or “then whisper in my ear like you mean it.” While we’re sure that wouldn’t end well, it’d at least be entertaining.

*****

Regarding our piece on by Chloe, one lawyer wrote us citing this article as support:

One note re: Chloe and the Sub V debt limit, is that its temporarily raised to $7.5 MM (still too low if you ask me), but also Sub V offers a method for existing equity to retain its shares without having to pay all creditors in full (basically, no absolute priority rule), so could be an interesting dynamic with the litigation from Chef Chloe. 

Interesting indeed. We’ll have to keep an eye on that.


📚Resources📚

We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.


📤Notice📤

Bruce Goldstein (Senior Director) joined Capstone Headwaters from Amherst Partners.

Dan Prieto (Of Counsel) joined Jones Day from Golub Capital.

Emma O’Neal (Senior Vice President) joined AlixPartners from EY.

Glenn McMahon (Managing Director) joined Portage Point Partners LLC.

Rachel Mauceri (Senior Counsel) joined Robinson+Cole from Morgan Lewis & Bockius LLP.

🙌Congratulations to:🙌

The following folks at AlixPartners who got promoted to Managing Director: Jim Bienias, Jesse DelConte, Clayton Gring, Adam Hollerbach, Clare Kennedy, Jason Keyes and Mauro Trabatti.

Joseph Bain of Jones Walker LLP on being named Co-Leader of the firm’s Bankruptcy, Restructuring & Creditors’-Debtors’ Rights Team.

Marathon Asset Management on raising a new $2.5b fund focused on distressed companies.

Michael Mittelman on his promotion to Managing Director at Finsbury Glover Hering.

Pachulski Stange Ziehl & Jones LLP on opening a new Texas office (Houston) manned by Michael Warner, Benjamin Wallen, Ayala Hassell, Kerri LaBrada and Denise Mendoza.

Ryan Kielty on his promotion to Partner at Centerview Partners.

Sabrina Fox on becoming the CEO of The European Leveraged Finance Association.


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