💩The Fiction that is Transparency in Bankruptcy💩

Internet Trends, MACH Gen, iHeartMedia Inc.

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Midweek Freemium Briefing - 6/13/18
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Regarding “Asset Values Soar: Human Asset Values. (Long Inflation)” wherein we discussed biglaw associate pay increases and Weil Gotshal & Manges LLP’s new partner policy, one loyal reader wrote:

“Partner in 7.5 years for everyone? The Participation Trophy has filtered into the professional world.” 

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News of the Week (3 Reads)

Internet Trends Part III (Long Disruption)

We’ve been covering Mary Meeker’s robust report on internet trends over the last week: part I is here and part II is here (paywall).

Social Media. The affect of social media on retail these days cannot be overstated. Social media — particularly Facebook ($FB) and Instagram — have been driving product discovery to the point where 55% of respondents between the ages of 18-65 years old say they have purchased online after social media discovery. Take a look at this (somewhat confusing) chart about how social media has driven double-digit direct-to-consumer $100mm revenue companies within early years of inception (1-6 years):

That’s nuts. No physical footprint: just a marketing spend.

This gives social media platforms a tremendous amount of leverage in terms of pricing power. Recall that Mark Zuckerberg recently indicated that the newsfeed has hit its saturation point; in other words, he said he cannot reasonably expect to increase the volume of ads in people’s news feeds without significantly degrading user experiences. What do you do if you cannot increase the volume of ads in the newsfeed? Well, you raise the price of the volume you currently have. Per Digiday:

Soon, Brooklinen was spending up to 75 percent of its overall ad budget on Facebook. But Brooklinen and other DTC companies, and marketers of all stripes, were pouring money into Facebook’s giant ad machine, lured by micro-targeting segments. Simple economics took over: Facebook ads became very expensive for DTC brands like Brooklinen, Thinx, Roman and Quip — all of which are now diversifying their spending to new channels, including fuddy-duddy outlets like out-of-home, terrestrial radio and even — heavens — print.

We’ll see if this plays out in Facebook’s next quarterly earnings (we doubt it). Still, this makes “customer lifetime value” all the more important (to justify the cost of acquisition):

Bankrupted retailers with a plan of increasing e-commerce have to recognize that e-commerce alone — in the absence of some fantastic brand appeal — is not enough. Discovery will be required. This will require social media (and influencers on social media, more likely than not). Which will require blasting through that saturation level. Which will require increased marketing spend (read: high customer acquisition costs). Retailers better be capturing data and deploying loyalty programs to extend the customer lifetime value of each person who comes through the discovery funnel. Otherwise, the marketing spend will carve a path to Chapter 22.

Subscriptions. This is why there has been so much more emphasis on MRR and ARR (“monthly recurring revenue” and “annual recurring revenue”). E-tailers need it to justify the marketing/discovery spend. Note:

Meanwhile Stitch Fix ($SFIX) reported earnings the other day — noting a large increase in “active clients”. The stock soared. Spotify ($SPOT) hit an all-time stock high on Monday. Like Scott Galloway, some of us are waiting for the John Varvatos subscription option. So much of this is done by mobile:

The above chart is amazing. People have really become accustomed to shopping on their mobile phones: 54% growth!! (They’re also watching a lot of Netflix ($NFLX) behind closed doors at the office. Damn our open floor plan!).

This also helps explain the demise of physical retail:

It would be great if the next retailer in bankruptcy did a deep dive like the above to explain with specificity why they’re bankrupt (other than private equity, that is). As we’ve been saying, simply saying the “Amazon Effect” is lazy AF.

More on this report on Sunday.

2. Bankruptcy is Not Transparent (Long Redaction)

Bankruptcy is a strange animal. It purports to be a transparent process with, among other things, open courts, its 9019 filings, endless schedules and statements of financial affairs, monthly operating reports (if a company actually files them…cough, Toys R Us), and fee applications broken down into six minute increments. The truth is, however, that it is far from transparent. This is a disservice to the bankruptcy process. Settlements predicated upon redacted briefings/reports creates an information dislocation number in the market that benefits those who stand to benefit from opacity and hurts those who could benefit from the lessons of past cases. Think committees pursuing fraudulent conveyances. Think Boards negotiating with management over compensation pre-petition. Think consultants and media folks who are trying to understand what may have gone wrong. We could keep going.

Want to know to what degree a private equity firm structured a transaction to milk a company of value? Good luck understanding that from this (source: Nine West, docket 361):

We suppose one can surmise what that was about and walk away with the gist. Sycamore made a ton of money and the question is whether it was a constructive fraudulent conveyance. Still, it would be great to see the meat on the bones.

Want to know whether there are grounds to disqualify an “independent” director and his investigation into potentially fraudulent pre-filing activity? Good luck. In Payless Holdings LLC, the Official Committee of Unsecured Creditors filed a report delineating its findings with respect to the multiple dividend recapitalization transactions that transpired in that case. It would have been a great playbook for attacking such transactions — pervasive as they now may seem — and the “independent” directors who purport to investigate them (PETITION Note: just once we’d love to see a judge call out this sham, enjoin such an investigation immediately (to save fees), and let the committee proceed without having its role subjugated by the alleged “independent” and his lawyers/FAs). Alas, the report was filed under seal and the issue swept under the rug via settlement. We would’ve liked to have seen this litigated in the light of day. Instead it was settled under a veil of secrecy: the report remained under seal and so the market could not judge the merits of the arguments for future reference. The only clear takeaway was that a PE firm could pre-orchestrate an LBO with immediately-following-dividend-recaps and only suffer the indignity of a few MSM headlines, a settlement at a fraction of the potential liability, AND still have its playbook left intact. Brilliant.

Want to know who received potentially preferential payments on the even of bankruptcy? Yeah, so does Bloomberg. In the iHeartMedia Inc. matter, Bloomberg questioned the debtor’s redactions of a court filing. At issue is $27 million of payments that the company made in the months before bankruptcy to “talent” like Glenn Beck, Rush Limbaugh, Sean Hannity, Ryan Seacrest and others who really make us want to click on dictionary.com and verify whether our understanding of the word “talent” comports with reality. With that list and that label, we think not.

Anyway, per The Wall Street Journal (paywall),

Redactions in iHeart’s required filings drew a protest from Bloomberg News. At a court hearing in Texas last week, a lawyer for Bloomberg said the redacted documents don’t comport with the principle of full disclosure of financial affairs of companies or people seeking bankruptcy protection.

The lack of disclosure in the big broadcaster’s bankruptcy case is unusual but not unprecedented, even in the radio industry.

Earlier this year, Cumulus Media Inc., the nation’s number two broadcaster, filed bankruptcy reports omitting the names of people or companies which received money from it for “programming costs.” Five of those unnamed recipients received, in the aggregate, more than $11 million in the months before Cumulus filed for bankruptcy protection, court records show.

This is what Bloomberg wrote (docket 844):

Like in Cumulus, the company offered platitudes about the need to protect privacy but took it a step further: it said that it was concerned about identity theft. That’s a head scratcher. And it didn’t stick.

More from WSJ,

Under pressure from Bloomberg, iHeart changed its argument and now says that disclosing the names would put it at risk of competitive harm.

More from WSJ,

Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill, said there are too many requests to seal documents in federal courts that don’t meet the standard for confidential treatment.

“I am glad to see pushback,” she said. “Federal courts need to stay public, including and especially bankruptcy court.”

And yet it’s super strange. It isn’t the United States Trustee of the Official Committee of Unsecured Creditors that’s pushing back on the company’s disclosure. Rather, it is an unaffected party. And it isn’t a critical issue. In fact, in the company’s defense, is this disclosure really constructive other than for its tabloid-esque value? The company notes,

Mr. Voskhul fails to demonstrate any valid justification for compelling the Debtors to provide this information. Bloomberg plays absolutely no part in these chapter 11 cases. It is not a creditor and did not attempt to request this information from the Debtors. Instead, Mr. Voskul went straight to the Court with his request. Given a lack of demonstrated reason or any connection to the chapter 11 cases, the motive behind Mr. Voskuhl’s request seems to be transparent: Bloomberg wants to obtain the information regarding amounts owed to high-profile individuals and on-air talent in order to write an article that would attract readers and benefit their business. Doing so at the expense of the Debtors’ interests, however, is not a compelling reason for the Court to reconsider the Order.

Hmmm. Seems like a fair argument.

Nonetheless, bankruptcy really should be more transparent. The likes of Bloomberg and The Wall Street Journal shouldn’t have to make tenuous arguments when the process has baked in safeguards — statutory or judicial — that ought to be applied but often are not. Which begs the question: why not?

3. MACH Gen LLC Files Chapter 22 (Long PETITION Predictions)

In ⓶⓶Is A Fresh Batch of Chapter 22s Coming?⓶⓶, we asked "Did Talen Energy's Acquisition of MACH Gen Miss the Mark? (Short Synergy)". Apparently the answer is yes to both questions: MACH Gen is now in bankruptcy court for the second time in four years. 

New MACH Gen LLC and four affiliated debtors have filed a prepackaged chapter 11 bankruptcy that seeks to partially equitize its first lien debt, transfer interests in the Harquahala facility in Arizona to the First Lien Lenders, eliminate approximately $95 million of debt off of the company's balance sheet, shed approximately $20 million of annual interest expense, and reorganize around two of the debtor entities. If the plan is effectuated, the company will emerge from bankruptcy with a (slightly) trimmed down balance sheet including (i) $512 million of first lien debt split among a revolving credit facility and two term loans and provided by the prepetition First Lien Lenders and (ii) approximately $25 million in a new second lien term loan provided by Talen Energy Supply LLC. The First Lien Lenders have also agreed to provide a $20 million DIP credit facility. The proposed plan of reorganization appears to be fully consensual among the various debt and equity interest holders. Accordingly, the company hopes to confirm the plan within 45 days of filing and obtain regulatory approvals another within an additional 45 days. 

The company is the owner and manager of a portfolio of three natural gas-fired electric generating facilities: (1) a 1,080 MW facility located in Athens, New York that achieved commercial operation on May 5, 2004 (the “Athens Facility”); (2) a 1,092 MW facility located in Maricopa County, Arizona, that achieved commercial operation on September 11, 2004 (the “Harquahala Facility”); and (3) a 360 MW facility, located in Charlton, Massachusetts, that achieved commercial operation on April 12, 2001 (the “Millennium Facility,” and collectively with the Athens Facility and the Harquahala Facility, the “Facilities”). The company generates revenue by selling energy, capacity and ancillary services from the Facilities into relevant power markets. In the last fiscal year, the company generated approximately $269 million of operating revenue at a net loss of approximately $10 million. 

These numbers shouldn't really be surprising. In May we highlighted the following:

Here is where natural gas prices were (i) in April 2014 around the time of the bankruptcy filing (5.97), (ii) in November 2015 (2.08) at the time of the Talen acquisition, (iii) in June 2016 (2.57) at the time of the announced Riverstone transaction, (iv) in December 2016 at the time the transaction closed (3.58) and (v) where they stand now (~2.69):

This change in the natural gas market (and regulatory hurdles) flipped "compelling future projections" to "a challenging operating environment" and, in 2016, the company "significantly underperformed" its way to a net loss of $589.8 million. Given the current environment for natural gas, we'll see whether this transaction does the trick. After all, as the company notes, "[a]though the Plan will result in the elimination of debt, Reorganized MACH Gen will continue to have a significant amount of indebtedness after the Effective Date." See you in four years? 


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 TheranosElizabeth Holmes’ epic deception. We are definitely adding this to our list of beach reads.

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