Another quarter is in the books and we here at PETITION continue to be flattered by the reception that you’ve given us. Thank you for your continued readership and support. If you’re not yet a Member, please consider joining our ever-growing community today. If you’re a student, email us for special student rates.
One thing we particularly enjoy is feedback from our readers. We endeavor to do our very best to be accurate with our coverage but sometimes we make mistakes. When we do, please don’t hesitate to call us the morons that we can sometimes be. Just email us at firstname.lastname@example.org.
One Managing Partner at a law firm wrote us that we made a mistake in “️Disruption May Be About to Affect Your Wallet (Long Infrastructure Needs)️” (paywall). We incorrectly stated that Governor Mike DeWine of Ohio is a Democrat. He is actually a Republican. We have corrected the mistake on the website.
Another Partner at a law firm pointed out that we misstated the amount of the committed DIP credit facility in the Hexion Holdings LLC matter. We have corrected the mistake here.
Of course, not all feedback was of the “you guys are morons” ilk. Thankfully. We get some general feedback too:
“When’s the podcast launching? Your following of lazy rascals will be ecstatic with a lazier way to get all the info.” — Restructuring Advisor
PETITION Response: It’s in development but there are some obvious complications. 😎
“You should know it takes me much longer to read your weekly email newsletter than your estimated published times.” — Liquidator
PETITION Response: Maybe if we use bright yellow, red and black fonts it will speed things up for you.
And then there is more specific feedback. In response to “💥Sycamore Partners is a B.E.A.S.T. Part I.💥,” a number of you wrote in. Some feedback included:
“You are the voice of a generation. This was pure gold!” — Restructuring Advisor
“This article is next level hilarious.” — Student
“As someone who used to summarize lots of cases and hearings when I was more junior, I can say that your Aero summary is the single greatest thing I’ve ever read.
I think you’ve got the difficulties with equitable remedies flipped. It’s not the prongs on prongs on prongs that are difficult, it’s the evidentiary burden. You hit it right on the head with 14(!) witnesses (and probably hundreds of trial exhibits). Funds that are experts in these types of transactions won’t get caught dead with the smoking gun needed to prove this stuff at trial - either through careful record building early on and/or discovery practice.
But like a judge once told me, sometimes you need to shoot one of the sheep in front of the flock. If this were to happen in a big case with lots of publicity, then behaviors might change. Too many road blocks to that like lowball UCC settlements (a la Payless) and judicial temperaments.” — Biglaw Attorney
But this one took the cake (edited to conceal the writer):
Petition, can't tell you how much I loved the Sycamore Partners article! Can't wait for Pt. 2 to drop.
Your mention of Aeropostale triggered some old thoughts... at the time Aero filed its petition, [I dug] around to see what could be learned about Aero's post-petition real estate tactics... since 2016, I can't stop surmising…
I marveled at this deal then and now. Once the $SPG/$GGP(nka $BRP)/ABG deal was approved, Buyer got to pick lease rejections and assumptions. Simon/GGP's initial proposal (Sept 12) rejected every store lease that wasn't in a GGP/Simon mall. Savage. In the weeks following, I can only imagine the back alley beatings put on $TCO $MAC Westfield $CBL and others as they begged their collective arch-rivals to keep the stores open--oh the blood(rent)letting! The assumption notices started flowing in… no way to know what concessions were in those lease amendments! Just to think of $TCO surrendering rental revenue to Aero to keep Aero in place knowing it [sic] inflicting harm to $TCO's metrics (and possibly its valuation) and was flowing back to $SPG and $BRP. Double bitter. Initially, the deal structure was hush-hush, but in the subsequent earnings transcripts over the last 2 years both $SPG and $GGP have stated plainly that they bought Aero for 1xEBITDA, so have made a killing on the investment alone, not to mention the far more juicy bits.
More importantly, $SPG and $BRP control some of their own tenancy now--all the Aero spaces are available to rent to the right new tenants without sacrificing current occupancy rates. Aero stores are inventory on-demand. Is there a dreadful zombie space of 8,000sf at the wrong end of the mall? Just slot in Areo: goose occupancy rates and ease worries of co-tenancy claims! Bring home all that international licensing revenue, and "distribute" it to the owners in the form of rents, as they may be adjusted. Probably as tax-slick as it gets. $SPG and $BRP scratch each other's backs--I can't image what the Aero Real Estate committee looks like in action! [Authentic Brands Group] presenting leases and amendments in $SPG and $BRP malls to representatives of $SPG and $BRP! Oy! The rents in those new stores could really goose their owner REITs’ reported leasing spreads, occupancy rates and NOI metrics. If the stores’ profitability is not the real objective, then the lines get even blurrier.
Since exiting, I wonder what has changed in footprint within the $BRP and $SPG portfolios, since it is a "captive" tenant? The operator is ABG, of course, but I’ll bet lunch that 100% of the growth stores are in either $SPG or $BRP centers. Or, if Aero has opened in a competitor's mall, I would have to believe it would be at nearly breakeven for the outsider-landlord. So, Aero's store would be oh-so-cash-flow-positive to continue to fund the very competitors of that hapless landlord.
That’s quite a “store growth” story. A decidedly different “where are they now” post Ch 11 success story, indeed.
Is the next chapter ABG's acquisition of Nautica, et al. vis a vis $SPG's Premium Outlets division? I don't know what the right metaphor is… from the perspective of other retailers… but maybe something like the fox setting up an omelet stand in the hen house! — Real Estate Investor
🤔 Maybe some bank analysts should start asking some detailed questions about Aero on future earnings calls: as far as conspiracy theories go, that one is pretty damn meaty.
💥Sycamore Partners is a B.E.A.S.T. Part I(b).💥
Speaking of feedback, one investor wrote us that the Twitterati — and PETITION to a lesser extent — had the Sycamore/Staples story all wrong. The dividend recapitalization doesn’t affect the retail story one way or another. That is because Sycamore did, in fact, separate the Staples business into multiple businesses, with the debt remaining at the Staples North American Delivery (“NAD”) entity. Staples U.S. Retail and Staples Canada Retail, as the other two units are now called, aren’t on the hook for the billions of dollars of debt. And, so, other than a bitchin’ new logo, Staples Retail isn’t really the story.* Once again, Sycamore is.
The Staples NAD lender presentation is an enlightening (and somewhat propagandist) look at the fast, furious and savage nature of the private equity model. In less than two years, Sycamore has (i) completed its intended business separation, (ii) improved EBITDA by $160mm “through stable top-line performance, expanded merchandise margins, and SG&A reductions, (iii) identified an additional $185mm of additional cost opportunities beyond 2019, (iv) bolted on some acquisitions, and (v) recruited 8 new members of the senior leadership team. Adjusted EBITDA is $1.2b (providing for certain acquisition-related addbacks). How the hell did Sycamore achieve all of this?
In part, by squeezing. The company has increased merchandise margins through “vendor negotiations.” Eat it vendors! Private equity is in the HOUSE!! The company reduced fiscal year ‘18 SG&A by over $100mm “through restructuring initiatives.” Eat it employees!! Private equity is in the HOUSE!! 900 of you can pack yo’ bags!! And hey you. Yeah you. Sales force employee #901 who thinks she’s safe. Well, newsflash: you’re not. Sycamore predicts another $19mm in sales force savings in 2019.
What about you, Mr. IT guy? That’s right:
Sycamore has another 70 full-time employees in the IT department slated for termination to the tune of $6mm in headcount savings. How? “Order management system consolidation.” Read: tech is replacing humans. Another $20mm of savings will come from robotics within Staples’ facilities. And yet another $10mm will come from outsourcing support from internal to low cost contractors (PETITION Note: short the US; long India). When talking heads say that PE strips out costs like a bawse, they’re not kidding. Is this dude on payroll?
NAD has fiercely competed to retain revenue and promote existing customer growth. Staples NAD now purportedly has ~2x as much revenue as Office Depot and ~3-4x more than Amazon Inc. ($AMZN). These guys sell a f*ck ton of office supplies, ink/toner and paper — about $5b worth. That’s insane. And they’re getting after the private label space, where the company has margins over 50%.
To put a finer point on this, look at this slide:
These guys aren’t messing around. These guys did their thing and now they’ve got an eye towards an IPO or a sponsor-to-sponsor transaction. And then it — and its 4.5x net debt ratio — will be someone else’s problem potentially heading into a downturn. There is no coincidence here from a timing perspective. Vicious.
You’ll recall that Staples NAD went out to market shopping Sycamore’s scraps….uh…we mean a new $3.2b first lien term loan and a package of secured and unsecured notes to refinance its capital structure and give Sycamore one hell of a check to cash out its equity:
Well, the market reaction was…uh…interesting. Rather than issue $3.25b of senior secured term loans, the company will complete a $2.3b term loan, splitting the rest of the capital structure between secured ($2b) and unsecured notes ($1b). And the company did have to upsize the secured note piece relative to the unsecured piece. While the yield on the secured bit was mildly tighter than anticipated, the yield on the unsecured piece priced slightly wider than initially expected, indicating that the appetite for the unsecured notes was cautious — even at nearly 11% yield. Looks like certain investors didn’t buy in to the propaganda. Or Sycamore’s reputation precedes it. Either way, Sycamore reportedly took down 18% of the unsecured allotment and apparently agreed not to trade the notes for several months to help push the deal through. 🤔
That said, will Sycamore’s dividend get paid? Well, duh, of course. The market’s reaction to the issuance has no bearing on that whatsoever. Which is not to say the reaction isn’t telling — especially when the paper immediately trades lower as it did here. Short Sycamore’s scraps.
*This thread about Staples’ new logo, however, is pure comedy:
Just imagine how amped Sycamore must be to pull out all of its equity and just ride an option for the next few years.
A Message From:
Attending the ABI 2019 Annual Spring Meeting in DC tomorrow? Then consider stopping by the Opening Reception Thursday evening! It's a great place to (i) meet up with restructuring friends, frenemies, and colleagues, (ii) share a few 'war stories’ and boast about recent successes, (iii) exaggerate how busy you are, (iv) commiserate with others about how much busier you can be, (v) discuss how more and more big cases file for bankruptcy somewhere other than Delaware, and (vi) much much more.
As a sponsor of the reception, our entire team will be there including, Ted Gavin, Joe Solmonese, Amy Gavin, Anne Eberhardt, Stan Mastil, Ross Waetzman, Chuck Lewis, Jeremy VanEtten, and Michael Zhang. The reception is from 6:00-7:30pm and you'll find our team in or near the Scarlet Oak Meeting Room in the center of the Mezzanine Lobby. The 2019 ASM promises to be one of the best ever, and the Opening Reception is THE right way to kick it off. Hope to see you there or sometime throughout the conference.
Would you like to post a “Message” in PETITION? Email us at email@example.com for info. Cheers!
Aftershocks Appear Post-Sears. Part III(B) (Short ICON).
Now just imagine your name is “ICONIX” — as in, Iconix Brand Group ($ICON). 😬
Over the last couple of months, we’ve touched on a number of companies that have been effected by Sears Holding Corporation’s descent into bankruptcy and pseudo-liquidation ($SHLDQ). In “💥Sears = Sh*t Show💥,” we discussed Hanesbrands Inc. ($HBI) and VF Corp ($VFC) and Iconix Brand Group ($ICON). We wrote:
ICON, which runs various brands like Candie's, Bongo, Joe Boxer, Mudd, Mossimo, London Fog, Ocean Pacific, Danskin, Cannon, Royal Velvet, Fieldcrest, Starter, Waverly, Zoo York and Umbro, reported earnings on Friday and immediately blamed Sears’ bankruptcy for its abysmal results. Which, again, begs the question: what the hell were these guys expecting? Were they off hanging out with Cyrus Capital?
The company experienced a 13% YOY revenue decline in Q3 and a 16% YOY decline for the nine months ended September 30, 2018. Across the board, generally, this was a turd. Revenue declined 28% in its women’s segment, 36% in its men’s segment, and 6% in its home segment. In its international segment, however, the company experienced 26% revenue growth on the back of its Umbro and Lee Cooper brands — but that wasn’t enough to offset the horrible performance elsewhere.
The company marked a $8.2mm bad debt expense as a result of the Sears bankruptcy. The company also lowered its full year revenue guidance on account of the Sears BK.
Things have only gotten worse. ICON reported a 37% YoY decrease in EBITDA and a 12% overall decrease in revenue in its latest earnings release. Per the Company:
Our revenue for the fourth quarter of 2018 and the full year 2018 were also impacted by the effect of the Sears bankruptcy on our Joe Boxer& Bongo brands in Womens and the Cannon brand in Home.
Its bad debt expense from Sears was especially shocking — and it included guidance warning of future bad debt expense incurrence:
Included in these expenses was an $8.2 million bad debt expense as a result of the Sears bankruptcy filing. (emphasis added).
Here is a snapshot of its EBITDA comparison YoY:
HOT DAMN that’s ugly! It’s as if women were afraid they’d contract rabies if they entered a Sears location or typed in “sears.com” into their web browser. That 71% drop in the women’s category is STAGGERING. Revenue was down 18% for the quarter and 17% for the year. Adjusted EBITDA decreased 37% for both the quarter and the year.
Here is what the company’s capital structure looks like:
$189mm Senior Secured Term Loan;
$365mm Senior Secured Notes;
$95.2mm Variable Funding Note;
$171mm Senior Secured Term Loan; and
$48mm 5.75% Convertible Notes.
With adjusted EBITDA around $74mm, this puts the company’s leverage ratio at approximately 10x.
And, so, this is where those converts are trading:
And this is where the stock is currently trading:
We’ll come back to this price because there’s more than meets the eye here.
Compounding matters, last November, the Company noted in a Form 8-K, that its financials shouldn’t be relied on. In addition, if the company gets delisted from the Nasdaq, per its debt covenants, its convertible bonds that mature in 2023 would be due immediately:
If the Company undergoes a fundamental change (which would occur if the Company experiences a change of control or is delisted from NASDAQ) prior to maturity, each holder will have the right, at its option, to require the Company to repurchase for cash all or a portion of such holder’s 5.75% Convertible Notes at a fundamental change purchase price equal to 100% of the principal amount of the 5.75% Convertible Notes to be repurchased, together with interest accrued and unpaid to, but excluding, the fundamental change purchase date.
Nothing a shady-a$$ 10-for-1 reverse stock split can’t cure. This trickster is ripping out every shenanigan out of the playbook. That $1.44/share price is after a March 14 reverse stock split and yet it’s STILL dangerously close to levels that might lead to a delisting (which would occur if the stock dipped below $1/share and remained there for three consecutive months).
Part of this is attributable to the fact that Sears is only the tip of the iceberg. The company confronts a deluge of issues with its customer base as its brands descend farther and farther away from “iconic” status. The company relies on brand licensing agreements with department stores such as: Kohl’s Corporation ($KSS), Macy’s Inc. ($M), J.C. Penney Inc. ($JCP), and other major retailers such as Target Inc. ($TGT), Walmart Inc. ($WMT), and Belk (owned by private equity firm, Sycamore Partners).
Per the Company’s most recent 10-K, in its risk section:
“A substantial portion of our licensing revenue is concentrated with a limited number of licensees, such that the loss of any of such licensees or their renewal on terms less favorable than today, could slow our growth plans, decrease our revenue and impair our cash flows.”
To point, relating to its Mossimo brand, the company noted:
“The license agreement with Target expired on October 31, 2018. We are in the process of developing a “go forward” strategy to position the brand in mid-range retailers, off price retailers and online retailers in an effort to transfer the name of the brand developed over the years with the consumer.”
The Company further noted other contracts that are not planned to be renewed. Relating to its Danskin/Danskin Now brand:
“As previously disclosed, the Company was notified that Wal-mart will not renew the existing Danskin Now license agreement for the brand subsequent to its expiration in January 2019.”
Relating to MG Icon – Material Girl:
“Concurrent with the formation of this joint venture, MG Icon entered a direct-to-retail exclusive license with Macy’s Retail Holdings, Inc. (“Macy’s”) covering a wide array of consumer categories across the Material Girl brand. As previously disclosed, the Company was notified that Macy’s will not renew the existing license agreement for the brand subsequent to its expiration in January 2020.”
And Royal Velvet:
“As previously disclosed, the Company was notified that JC Penney will not renew the existing license agreement for the brand subsequent to its expiration in January 2019”
Consequently, the company’s management is performing triage…when they’re not questioning life choices, we reckon. Robert Galvin, the newly minted CEO of ICON had this explanation for the company’s subpar performance on the company earnings call:
We experienced the Sears bankruptcy, an impact to our Bongo, Cannon and Joe Boxer businesses. We also experienced the departure of a number of executives, planned and unplanned. I joined the Company in mid October of 2018, and our new CFO, John McLean, joined in February 2019.
You almost have to feel for the guy.
In “Sears = Drama Queen. PLCE = Future Seer,” we wrote:
Many people often note the stigma attached to a debtor and the effect of bankruptcy thereon, but not enough people talk about the effects of bankruptcy in a more macro sense.
ICON continues to be a poster child for those effects.
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
⚡️Notice of Appearance⚡️
This week we welcome a notice of appearance from Gregory Segall, the Chairman and CEO of Versa Capital Management LLC.
PETITION: Everyone is talking about "too much money chasing too few deals." Can you enlighten us a bit as to your experience looking to acquire or invest in middle to lower middle market companies (in or out of bankruptcy)?
Can safely say the conventional ‘distress cycle’ has been hyper-extended by the combination of low interest rates, multiplying sources of non-bank lending sources and economic strength. We track the outcome of all deals we do not buy and our number one competitors at the moment are either “liquidated” (i.e., too sick to save) or “refinanced” (i.e., found someone who let them kick can down road...again). But at the end of the day, the cycle has been delayed, not denied, so our mantra remains “Distress 2020!” (unless it’s 2021...)
PETITION: Given how disruptive technology has become and how quickly "change" appears to be occurring, how do you evaluate management teams and scrutinize their projections today? Have you changed any methodologies from, say, 10 years ago?
I see two layers to the question, one being the effects on a business of technology and how that impacts projection reliability, and then management competency in making projections. On the former, most everyone’s crystal ball has been off both in identifying where technology may be applied to or disrupt a given business’s expectations. On the latter, the quality of management projections, whether 13 week cash flows or 5 year valuation models, is usually a function of how long a given companies business cycle is (ie fast food has pretty good short term insight but pretty foggy about 1 or 2 years out, vs. building locomotives usually cannot do much about short term but can have pretty good visibility over the medium-longer term given the procurement cycle). Sprinkle all this with the question of management’s competency and command of the business, both from the forest and the trees, and that will tell you something about projection reliability.
PETITION: Versa owns Avenue Stores since its 2012 bankruptcy. The company once had 500 stores and now, according to its website, it has 262. What lessons have you guys applied to that business and what continued evolution is in store? Where do you see retail in 5 years? 10 years?
When we acquired Avenue its store base was immediately pared to about 300, and over the last few years the company has been letting leases roll off where stores are less productive; fortunately Avenue has always had a strong and sizable eComm/direct business (~33%) so the store roll off gets offset by ecomm growth, and going forward where possible a retailer like Avenue can operate in a much smaller footprint (ie 3,000 sqft instead of 5-6,000) and therefore more profitably so they are executing that shift wherever they can. Retail will continue to transition for years to come, and it is somewhat helpful that landlords are starting to become more realistic about the need to make accommodations or lose tenants. “Retail” has always been a rough neighborhood; I expect it always will be whether 5 years or 10 years out, will just be a new set of challenges.
PETITION: The bankruptcy business has changed considerably in the years you've been in the space. What is the biggest issue you see today with the bankruptcy process and what's your remedy to solve it?
Aside from the bankruptcy code looking like the tax code in terms of all the “special interests” getting their fingers in the pie going back to the BAPCPA amendments, there used to be a much greater emphasis on seeing debtors reorganize. I won’t be the first to observe that most mid-market debtors “can’t afford to go bankrupt” given the cost and other pressures including timing and all the parties who keep trying to elevate their priority resulting in rapid administrative insolvency. Since “high costs” are certainly a difficult issue but almost impractical to reduce to a fixable sound bite here, If I had to choose one or two remedies it would be getting rid of or extending the shortened deadlines for lease assumption or rejection, as well as reducing the number and kind of pre-petition creditors that can elevate their claim priority.
PETITION: In addition to a lot of accomplished, senior folks like yourself, we have a great number of junior professionals and students that read PETITION. What is your advice for them? What is the best book you've read that's helped guide your career?
When starting out early in your career, don’t every view any task as being beneath you - add value by being seen as a go-to resource, make yourself like fly paper and things will stick to you, increasing your role and experiences in your organization. As for a book (or four), gIven how often it is cited It seems almost passe to reference Sun Tzu, but it is a great book on strategy and tactics; also recommend “How to Win Friends and Influence People” by Dale Carnegie, another classic - success in this business, or really in any, is often all about working with people. Regardless of your politics, “Rumsfeld’s Rules” is also a terrific summary of common sense management techniques from a guy who has had enormous public and private sector experiences. And finally from the standpoint of bankruptcy, I highly recommend “Feast for Lawyers” by Sol Stein - if you can find it, a great if slightly dated primer on the reorganization process, and a great read - more like a novel though based on true stories.
PETITION: Thanks, Greg.
PETITION LLC is looking to expand the team. Specifically, we are looking for a Chief Strategy Officer (or other commensurate title) to help take PETITION to the next level. The right candidate must be entrepreneurial, commercial, creative and, frankly, not too “corporate.” She/he must be willing to get her/his hands dirty in all aspects of the company, including, first and foremost, leading new strategic initiatives, but also engaging in sales, research/production, administration, etc. We will look at all candidates but financial advisory, legal, and/or journalism experience is preferred. Current Members will also get first look (logically, Members have a much better sense of what we write about and what we stand for). Email us at firstname.lastname@example.org and write “PETITION CSO” in the subject line.
If your firm has job opportunities, please email us at email@example.com.
Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.