Curated Disruption News
Midweek Freemium Briefing - 6/20/18
Read Time = 5.4 a$$-kicking minutes
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ICYM Sunday’s MEMBER Briefing:
Bankruptcy filings have seemingly ground to a halt. The year got off to a gangbusters start with Kirkland & Ellis LLP and Weil Gotshal & Manges LLP both filing some big chapter 11 cases. Q2, however, has been sloooooooooooow. Despite all of the noise from Washington DC around immigration, trade policy and more, the restructuring world seems set up for a quiet summer. Are there dangers lurking in the shadows?
While you’re basking in the sun at Lake Geneva, in Easthampton, or in the Amalfi, you may be inclined to scroll through Instagram and finally bite the bullet on those rad shoes you keep seeing as your 7th or 8th picture in your feed. Boom! You’ve now heightened the inevitable demise of some brick-and-mortar retailer near you. Some retail therapy may be sound comfort while you watch interest rates rise…just waiting to see how that — combined with the effects of Tax Reform and…gulp…tariffs — drops the hammer on leveraged (cov-lite) companies. In the meantime, there appears to be continued pain in the middle-market restaurant space. And the opioid situation continues to unravel and it seems inevitable that, eventually, there’ll be some bankruptcy-related shakeout there. Who will be the first victim?
In our Members’-only Sunday briefing “👎Tech is Booming. Except...Ed-Tech?👎” we discussed Blackboard Inc., Internet Trends, trucking, scooters and more. Did you miss it? Become a member by clicking on that little blue button below.
Speaking of members, we’d like to welcome a group from Cooley LLP to the Membership. If you have ten or more interested folks at your firm, email us for a group quote: email@example.com.
News of the Week (3 Reads)
1. Distressed Debt Funds Fundraise (Long Market Timing)
At the Wharton Distressed Investing Conference in late February, Marathon Capital Management’s Bruce Richards said that his firm was delaying fundraising new capital. He noted that while he fully expects the cycle to turn and, consequently, that there’ll be a plentiful amount of distressed opportunities, he doesn’t want to mis-time the raise in such a way that his lock-up will expire midway through the investment horizon.
A growing number of US hedge funds specialising in distressed debt are raising money in anticipation that the next economic downturn will punish companies that have borrowed record amounts since the financial crisis.
Mudrick Capital, for instance, is reportedly raising a second fund that will have a five-year lockup and only charge fees upon capital investment. The fundraising goal is December 1. Carry the 1, add the 5, and that effectively means that he’ll have through 2024 to invest.
Marathon Capital had better hope there are still LPs out there looking to fund the asset class. More from FT:
Mudrick Capital is not the only fund preparing for an eventual downturn in a US economy where growth is accelerating this quarter. Strategic Value Partners in May raised almost $3bn to pounce on distressed bonds and loans, while Sheru Chowdhry, formerly co-portfolio manager of the Paulson Credit Opportunities fund, launched DSC Meridian Capital at the start of June.
In total, seven distressed debt funds have raised money this year, with a record average size of $2.2bn, according to data from Preqin. The largest is the GSO Capital Solutions Fund III, which closed in April after drumming up $7.4bn in the fourth-biggest distressed debt fundraising ever.
With tariffs, a trade war, rising interest rates, ramifications relating to tax deductibility in Tax Reform, secular pressures, auto loan delinquencies and more, many people seem to think a downturn is on the horizon. The question is when? Someone is bound to get the timing right.
2. Internet Trends Part IV (Long Disruption, Long Auto Distress?)
In October, we asked “Is Another Wave of Auto-Related Bankruptcy Around the Corner?” The answer, at least in the time since, has generally been ‘no,’ sparking a need for us to make fun of ourselves in “Where’s the Auto Distress? (Short PETITION’s Prognostications).”
We’ve spent the last two weeks summarizing Mary Meeker’s impressively fulsome “Internet Trends” report. She has some bits on auto that are extremely interesting and relevant…
Transportation as a percentage of household spending is on the decline. Operation and maintenance costs have increased because cars are staying on the road longer. But even more important is the fact that the “other transportation” category is rising meaningfully.
And that is, in part, because it has become cheaper to travel via Uber than it is to own a personal car — at least in 4 of 5 of the largest cities. This explains the hockey-sticking leap in Uber’s gross bookings:
Notably, these charts do not account for Lyft, Via, and other ride-sharing providers. This could be a massive headwind for autos and, by extension, all parts of the auto supply chain.*
Peak Auto? 3-month US auto sales slows to 2% y/y. Further increases in Fed rates in the US might work as a negative catalyst for US auto sales during 2018 as refinancing costs to buy a car increase, Commerzbank says. pic.twitter.com/PgtTNRo9hyJune 18, 2018
Of course, taxis have already gotten their a$$es kicked with bankruptcies galore and, sadly, driver suicides. In that face of the above, there are apparently some entrepreneurial souls (God bless them) who think taxis have reached bottom. Crain’s noted on Monday,
This town may have a new “Taxi King,” or at least one in the making. But nobody really knows the potential potentate’s identity or business plan, other than that it’s an investment group that keeps its cards close to the vest.
The investors—linked by sources to Marblegate Asset Management, a Greenwich, Conn.–based hedge fund— won an auction last week in Queens for 131 taxi medallions that once belonged to deposed “Taxi King” Evgeny Freidman. The price: $170,000 plus about $12,000 in fees apiece.
Marblegate had purchased 46 of Freidman’s foreclosed placards in September. All told, the hedge fund is believed to now have 181 medallions, including four picked up at a smaller sale.
At least they’re bringing some levity to all of this:
The hedge fund was not the only mysterious presence at last week’s auction. While Marblegate, using the name Nardo Acquisitions, had made its $22.3 million bid the previous week as a stalking horse—a practice used in foreclosure auctions to set a floor—an additional eight medallions from Freidman’s decimated portfolio were not included. Court documents show the bankruptcy trustee agreed to sell those eight to a group calling itself Latka LLC.
Nardo appears to be named after Elaine Nardo, a character from the the 1970s sitcom Taxi.
That package had a floor of $2 million—$250,000 per medallion. At the June 14 auction in Flushing, no bidders topped either floor. Marblegate won the 131, and Latka kept the eight.
An industry insider traced Latka’s company address to a building in Greenwich next door to Marblegate’s. The company was also named for a character in Taxi—Latka Gravas, played by Andy Kaufman.
Amusing as the naming may be, what isn’t funny is how these purchase prices perpetuate the following question: is New York City f*cked?
We’ve spent the last few weeks discussing scooters. It’s only a matter of time before they come online in Chicago and New York City, among other cities. For now, though, the scooter companies have their hands full applying for permits in San Francisco. You can read the various applications here. Some highlights:
1) Lyft seems prepared to lose a lot of $ on this to bolster its brand of being friendly to cities/pub transit.
- "Up to a 100% discount on rides that start or end" MUNI, BART, and CalTrain
- "investing $1 per scooter/day" in SFMTA bike lanes
2) The hot, new R&D effort inside these companies is being able to detect when riders are on sidewalks. (Lime says 35% of surveyed users were on sidewalks at least half the time.) Lime is prototyping a sensor to alert its systems when a scooter is on roadway vs sidewalk. pic.twitter.com/SQUuhmP58xJune 18, 2018
3) Solving for parking issues: Jump wants to design its own parking racks and distribute them across city. Lyft wants to get local shops to put scooter parking zones out front. Skip giving up $150K in free rides to users who demonstrate parking compliance pic.twitter.com/i2tZPt3txcJune 18, 2018
4) Only 1,250 scooters total (across 5 companies) will be permitted 1st 6 months. Companies want more. Bird says "we believe our ideal fleet size would be significantly larger than the fleet of about 1,600 Bird operated at our peak in SF."June 18, 2018
6) Skip (which we wrote about here https://t.co/Eao8xcnjVe) appears to have one of the longest ranges before it needs to be charged. 30 miles. It's designed by S Korea-based minimotors, many of the rest (Lyft, Ofo, Bird) are Ninebot/Segway. Uber is iVelo. pic.twitter.com/7lPMS8G1BIJune 18, 2018
Moreover, transportation bottlenecks are getting worse in the big cities. Elon Musk just got approval for the Boring Company tunnel in Chicago for *$&^’s sake. New York City traffic is so impossible that Citi Bikes are officially faster, at times, than taxis — a concept that certainly won’t help the seeming deluge of taxi bankruptcies.
If you haven’t seen this Casey Neistat video, please stop what you’re doing and watch it NOW.
And then there is dockless bike sharing. Per Wired:
Dockless bike share is just the latest of a dozen new approaches to urban mobility in increasingly congested cities. Ride-hailing services, app-powered carpools, on-demand car rentals, electric bikes, scooters, and even self-driving taxis are all jockeying for riders on the streets of American cities. Together they are reinventing the way we navigate urban environments, reducing private car usage, improving traffic and commute times, and cutting emissions.
“Reducing private car usage.” 🤔💥🤔
3. #BustedTech (Short Busted IPOs…cough…DOMO).
Tintri Inc., a publicly-traded ($TNTR) Delaware-incorporated and Mountain View California based provider of enterprise cloud and all-flash and hybrid storage systems appears to be on the brink of bankruptcy. There's no way any strategic buyer agrees to buy this thing without a 363 comfort order.
In an SEC filing filed on Friday, the company noted:
"The company is currently in breach of certain covenants under its credit facilities and likely does not have sufficient liquidity to continue its operations beyond June 30, 2018."
"Based on the company’s current cash projections, and regardless of whether its lenders were to choose to accelerate the repayment of the company’s indebtedness under its credit facilities, the company likely does not have sufficient liquidity to continue its operations beyond June 30, 2018. The company continues to evaluate its strategic options, including a sale of the company. Even if the company is able to secure a strategic transaction, there is a significant possibility that the company may file for bankruptcy protection, which could result in a complete loss of shareholders’ investment."
And yesterday the company's CEO resigned from the company. All of this an ignominious end for a company that IPO'd almost exactly a year ago. Check out this chart:
Nothing like a $7 launch, a slight post-IPO uptick, and then a crash and burn. This should be a warning sign for anyone taking a look at Domo — another company that looks like it is exploring an IPO for liquidity to stay afloat. But we digress.
The company's capital structure consists of a $15.4mm '19 revolving credit facility with Silicon Valley Bank, a $50mm '19 facility with TriplePoint Capital LLC, and $25mm of 8% convertible notes. Revenues increased YOY from $86mm in fiscal 2016 to $125.1mm in fiscal 2017 to $125.9mm in fiscal 2018. The net loss, however, also moved up and right: from $101mm to $105.8mm to $157.7mm. The company clearly has a liquidity ("net cash") covenant issue (remember those?). Accordingly, the company fired 20% of its global workforce (~90 people) in March (a follow-on to a 10% reduction in Q3 '17). The venture capital firms that funded the company — Lightspeed Venture Partners among them — appear to be long gone. Silver Lake Group LLC and NEA Management Company LLC, unfortunately, are not; they still own a good amount of the company.
"Isn't cloud storage supposed to be all the rage," you ask? Yeah, sure, but these guys seem to generate product revenue largely from sales of all-flash and hybrid storage systems (and stand-alone software licenses). They're mainly in the "intensely competitive IT infrastructure market," sparring with the likes of Dell EMC, IBM and VMware. So, yeah, good luck with that.
We have compiled a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. You can find it here. We recently added four new books on our “to-read” list: (1) “When the Wolves Bite” by Scott Wapner (about the Carl Icahn/Bill Ackman Herbalife battle), (2) “I Love Capitalism!: An American Story” by Ken Langone, (3) “Factfulness” by Hans Rosling (recommended recently by Bill Gates) and (4) “Enlightenment Now” by Steven Pinker (recommended recently by Warren Buffett). We’ve added “Bad Blood: Secrets and Lies in a Silicon Valley Startup” by John Carreyrou. He tells the story of Theranos’ Elizabeth Holmes’ epic deception. We are definitely adding this to our list of beach reads.