📚The Future of Education📚
WorldStrides, Heaps of Oil & Gas Distress, Briggs & Stratton & More
|Jul 22, 2020||3|
📚Is Education in for a World of Hurt? (Short Old School. Literally.)📚
Here is an interesting piece from Michael Smith, Professor of Informational Technology & Marketing at Carnegie Mellon University discussing the future of education. He writes:
…I study how new technologies cause power shifts in industries, and I fear that the changes in store for higher education are going to look a lot like the painful changes we’ve seen in retail, travel, news, and entertainment.
And this is, he scathingly argues, because the business model has failed the mission:
Elite colleges talk about helping our students flourish in society, but our tuition prices leave many of them drowning in debt—or unable to enroll in the first place. We talk about creating opportunities for students, but we measure our success based on selectivity, which is little more than a celebration of the number of students we exclude from the elite-campus experience. We talk about preparing students for careers after graduation, but a 2014 Gallup survey found that only 11 percent of business leaders believed “college graduates have the skills and competencies that their workplaces need.” We talk about creating diverse campuses, but, as recent admissions scandals have made painfully clear, our admissions processes overwhelmingly favor the privileged few.
Now, he says, is an opportunity to explore the evolution of the educational model. And he’s not alone. NYU Professor Scott Galloway is of like mind. Professor Galloway writes:
Universities will face a financial crisis as parents and students recalibrate the value of the fall semester (spoiler alert: it’s a terrible deal). In addition, our cash cows (international students) may decide xenophobia, Covid-19, and H1-B visa limits aren’t worth $79,000 (estimated one-year cost of attending NYU). This has been a long time coming and, similar to many industries, we will be forced to make hard decisions. Most universities will survive, many will not. This reckoning is overdue and a reflection of how drunk universities have become on exclusivity and the Rolex-ification of campuses, forgetting we’re public servants not luxury brands.
Universities that, after siphoning $1.5 trillion in credit from young people, cannot endure a semester on reduced budgets do not deserve to survive.
Schools with ample financial resources, strong endowments and national reputations will continue to prosper, while the remainder will find themselves scrounging to keep their doors open, Thomas McLoughlin, Kathleen McNamara, Sangeeta Marfatia and other municipal-bond strategists at UBS said in a report published Friday.
Wait. Why would the global wealth management division be thinking about this? Muni bonds.
UBS says that the riskiest credits within the municipal-bond market fall into two categories: smaller liberal arts colleges whose selectivity and matriculation rates have fallen in recent years and bonds secured by narrow revenue pledges like student housing securities. The group recommend investors with a “moderate to conservative risk appetite focus their portfolio investments in the flagship campuses of major public universities and in highly selective private colleges.”
This is a side of the pandemic that hasn’t even come close to the surface yet.
With all of the above as background, Coursera, an online learning company, just announced that it raised a $130mm Series F financing round valuing the company at $2.5b. Clearly, New Enterprise Associates (the lead investor), Kleiner Perkins and others think that online learning isn’t just a passing fad — no matter what your experience may be at home with the kids. And that’s because that isn’t the hole Coursera seeks to plug; the company reportedly intends to use the proceeds to (a) help retrain unemployed workers and arm them with new and more relevant skills and (b) assist impacted university students with coursework.
Similarly, Udemy, another online learning platform, is reported to be looking to raise money at a $3b valuation.
People have been arguing that MOOCs were going to endanger expensive in-person learning for a long time and it hasn’t really happened. Query whether COVID-19 is the catalyst that the space needed. Just goes to show: there are always winners and losers in every scenario.
🌎New Chapter 11 Filing - Lakeland Tours LLC (d/b/a WorldStrides)🌎
Speaking of education…
Virginia-based Lakeland Tours LLC (d/b/a WorldStrides) and 22 affiliates (the “debtors”) filed for bankruptcy in the Southern District of New York, the latest in a relatively small group of COVID-related victims to end up in bankruptcy court. Similar to other pure-play filings (e.g., several Latin American airlines and Hertz Corporation $HTZ)), the debtors are in the travel industry; they are a provider of educational travel experiences in the US and abroad; they are the US’ largest accredited travel program serving hundreds of thousands of students and hundreds of universities annually. And they were doing well before the pandemic: in fiscal ‘19, the company generated approximately $650mm in net revenue and management projected $840mm in net revenue in ‘20. As we all know, “experiences” are all the rage these days and international student travel is far more common today than it was even five years ago (PETITION Note: seriously, folks, the company doesn’t even try to hide the social element to this … the above photo just screams “Pay us for an experience racked with non-stop selfies!). According to StudentUniverse and Skift, “[t]he student traveler represents fully one-fifth of all international arrivals in the travel industry, today. They command a market value of some $320 billion….”
A worldwide travel shutdown will obviously negatively impact that trend. And, by extension, obliterate the company’s projections. Indeed, the debtors were “decimated” by the worldwide shutdown of nonessential travel. Revenue? Lost. Future bookings? Crushed. Refund requests? Voluminous. The “negative net bookings” must have been off the charts. All in, these factors created a $200mm liquidity hole for the debtors.
This need for new capital, when coupled with the debtors’ burdensome capital structure ($768mm of funded debt), precipitated the need for a restructuring. And, alas, the debtors have a restructuring support agreement (the “RSA”) agreed to by the debtors’ prepetition secured lenders, their hedge provider and their equity sponsors, Eurazeo North America and Primavera Capital Limited. The RSA commits these consenting stakeholders to, among other things, a $200mm new capital infusion (exclusive of fees) split 50/50 between the consenting lenders and the sponsors which will roll into exit debt and equity.* Here are the highlights:
The $100mm provided by the lenders will roll into an exit facility;
The $150mm roll-up will roll into a second-out term loan take-back facility; and
The $100mm provided by the equity sponsors will convert into 100% of the common stock of the reorganized debtors (subject to dilution from a management incentive plan).
Holders of $126mm in subordinated seller notes will get wiped out along with existing equity interests.
General unsecured creditors will ride-through paid in full.
The major parties to the RSA will get releases under the proposed plan: creditors who vote to reject the plan will need to affirmatively opt-out of the releases.
The debtors already commenced solicitation and hope to confirm the plan on or about August 19. The post-reorg capital structure will look like this:
The above graphic is the biggest “tell” that the filing is predominantly about access to fresh capital. The deleveraging (of only $100mm) is rather secondary and inconsequential relative to the $200mm cash infusion. Which begs the question: if the debtors perform dramatically under business plan in coming years — perhaps, uh, due to a decrease in international student travel — will the company be in need of another restructuring? PETITION Note: as we write this, a talking head is pontificating on CNBC that business travel will be significantly lower in coming years than it had been — confirming the premise of this Bloomberg piece. If parents aren’t traveling for work, will they let their children travel for school?
The debtors certainly acknowledge the risks. In the “risk factors” section of their Disclosure Statement, they note that a “second wave” of COVID-19 could impact results (PETITION Note: we need to conquer the “first wave” to get to the “second wave,” but, yeah, sure.). They state:
The Debtors cannot predict when any of the various international or domestic travel restrictions will be eased or lifted. Moreover, even when travel advisories and restrictions are lifted, demand for study abroad and student travel may remain reduced for a significant length of time, and the Debtors cannot predict if and when demand will return to pre-pandemic levels. Due to the discretionary nature of educational travel spending, the Debtors’ revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased demand for educational travel, changes in booking practices and related policies by the Debtors’ competitors, all of which in turn have had, and may have in the future, a strong negative effect on the Debtors’ business. In particular, the Debtors’ bookings may be negatively impacted by the adverse changes in the perceived or actual economic climate, including higher unemployment rates, declines in income levels and loss of personal wealth resulting from the impact of COVID-19. The Debtors’ bookings may also be impacted by continued and prolonged school closings.
And they add:
This is the first time since September 11, 2001 that the Debtors have suspended their tours, and is the first time the Debtors have completely suspended their tours for an extended period of time. As a result of these unprecedented circumstances, the Debtors are not able to predict the full impact of such a suspension. In particular, the Debtors cannot predict the impact on financial performance and cash flows required for cash refunds of fares for cancelled tours as a result of a suspension of tours if such suspensions are prolonged further than anticipated, as well as the public’s concern regarding the health and safety of travel, and related decreases in demand for travel. Depending on the length of the suspension and level of customer acceptance of future tour credits, the Debtors may be required to provide additional cash refunds for a substantial portion of the balance of deferred tours, as customers who have opted to defer tours may request a cash refund.
And so it looks like the debtors are conservatively projecting $367.9mm of revenue in fiscal year 2021, slightly more than half of what they did in ‘19. They don’t expect to revert back to projected ‘20 numbers until at least 2024. Yes, 2024.
Now, generally, projections are almost always worthless. As the debtors’ risk factors suggest here, they may be even more worthless than usual depending upon how COVID shakes out. At least management appears to be realistic here that the business will not return to pre-COVID levels for some time. Let’s hope that a vaccine comes and they’re positioned to surprise to the upside.**
*$150mm of pre-petition secured debt will roll-up into the DIP.
**Houlihan Lokey pegs valuation between approximately $625mm and $745mm as of September 30, 2020.
📉Charts of the (Mid)Week📉
Since we’re on the topics of education and travel, this is R.O.U.G.H…
There should be a some turnaround though because…oh wait…rut roh…the consumer…
New Chapter 11 Bankruptcy Filing - Briggs & Stratton Corporation ($BGG)
You may not know of Briggs & Stratton Corporation ($BGG) but it’s likely that you’ve used one of its products. Its small gasoline engines are used in outdoor power equipment like lawn mowers, and it designs, manufactures and markets power generation, pressure washer, lawn and garden, turf care and job site products. Its engines even power go-karts! It offers a variety of different brands and its products are in 100 countries around the world.
The company has a rich history. In Wisconsin circa 1908, inventor Stephen Briggs and investor Harold Stratton co-founded what, two years later, would be an auto and auto parts manufacturer incorporated as Briggs & Stratton. The two men added small gasoline engines to their product suite, powering early washing machines and reel mowers. The company went public in 1928. For decades thereafter, the business ventured into agricultural and military applications (producing generators for the WWII effort), ultimately revolutionizing the first lightweight aluminum engine in 1953. The post-War suburbian boom helped fuel the company’s growth in the 50s and 60s. Lots of lawns to mow! The company has iterated a lot since then: it no longer produces auto components, for instance. The core business is currently focused around two segments: engines (primarily sold to OEMs of lawn and garden equipment) and products (i.e., outdoor power equipment, job site products, etc.).
Unfortunately, a rich history doesn’t insulate companies from distress — a lesson that many long-standing companies have learned lately as the bankruptcy bin fills to the brim with companies with 100+ year histories (see, also, BJ Services LLC, Brooks Brothers Group, RTW Retailwinds, Congoleum Corporation). Alas, the company and four affiliates (the “debtors”) also could not avoid chapter 11, filing early Monday in the Eastern District of Missouri, and citing (i) cautious ordering patterns from channel partners, (ii) weather, (iii) Sears’ demise and bankruptcy (bankruptcy dominos!!), (iv) consumer preference shifts, and (v) China, for its troubles. With approximately $200mm of notes maturing at year end (Dec) and a springing maturity of 9/15/20 if the notes are still outstanding by then, the debtors, to top things off, faced real challenges related to the balance sheet.
Because of all of the aforementioned factors, the debtors implemented a “strategic repositioning plan” that included shutting plants, laying off workers, suspending employee benefits, lowering capex and discretionary spending, eliminating a shareholder dividend and suspending a share repurchase program. COVID-19, as we’ve seen over and over again, got in the way of these efforts. “The preliminary estimate of the sales decline caused by the pandemic for the fiscal fourth quarter was $157 million and for the fiscal year was $197 million.” 😬
The good news is that the debtors have a buyer in the wings. Bucephalus Buyer LLC, a dramatically-named affiliate of KPS Capital Partners LP entered into a stalking horse purchase agreement with the debtors pursuant to which it would buy the debtors’ assets and equity interests in non-debtor subsidiaries for $550m in cash plus the assumption of certain liabilities. To fund this process (and take out the ABL in full), the debtors obtained (i) a commitment from prepetition ABL lender, JPMorgan Chase Bank NA, for a $412.5mm DIP ABL (L+3.5%), (ii) a commitment from KPS for a $265mm DIP Term Loan facility (L+7%) and (iii) consent to use the ABL lenders’ cash collateral. The DIP agreement mandates that a qualified sale order be entered by the bankruptcy court no later than September 24, 2020 (subject to caveats that would push the date out to December 31, 2020).
While it’s great that the company has a going concern prospect here, this situation is not all unicorns and rainbows. The noteholders are poised to get screwed here. And they won’t be alone. It looks likely that the debtors will also be looking to terminate health and insurance benefits for former workers.
This is how bankruptcy can be so heart-breaking. In the midst of a pandemic, hundreds if not thousands of people will no longer have benefits that they toiled for. Brutal.
⛽️New Chapter 11 Bankruptcy & CCAA Filing - BJ Services LLC⛽️
Texas-based BJ Services LLC and three affiliates (the “debtors”), providers of pressure pumping and oilfield services to the upstream E&P industry via two operating segments (hydraulic fracturing and cementing), filed a chapter 11 bankruptcy in the Southern District of Texas. Similar to the handful of frac sand companies that have fallen into bankruptcy court lately, the debtors are victims of a viciously negative trending frac spread count caused by the usual suspects…blah blah … Putin … blah blah … MBS … blah blah … COVID-19 … blah blah … volatile commodity markets … blah blah … decline in fracking … blah blah … extensive E&P bankruptcies … blah blah blah … dramatic decline in accounts receivable and liquidity … blah blah blah … $356.8mm of debt …. blah blah blah … borrowing base redetermination and the imposition of a healthy $47.5mm paydown and $86mm reserve. The situation just totally blows.
The crux of the case for now is that the debtors hope to arrive at an agreement with in-fighting lenders — there’s a $101.6mm ABL, a $190mm Equipment Term Loan and a $65.2mm Real Estate Term Loan — to use cash collateral and pursue a value-maximizing sale of parts of the business, winding down whatever is left behind (pursuant to a plan of liquidation on shortened notice). For now, though, nobody is playing well in the sandbox:
The Prepetition ABL Lenders, who have a lien on the Debtors’ cash, accounts receivable, and inventory, do not want their cash collateral to be used to liquidate the Equipment Term Loan Lenders’ collateral, as such use would benefit the Equipment Term Loan Lenders at the Prepetition ABL Lenders’ expense. Simply put, the Equipment Term Loan Lenders—who stand to benefit greatly from an organized chapter 11 process—need to share in the costs of these cases.
While the Equipment Term Loan Lenders have now expressed a willingness to fund a limited amount of costs, such funding is contingent on the Debtors lifting the automatic stay to allow the Equipment Term Loan Lenders to control the liquidation of their collateral. The Debtors do not believe this is a value-maximizing outcome for any party, particularly because the term lenders would not be properly incentivized to maximize the value of the assets beyond the value of their term loan. To be clear, the Debtors will object to any such request. Because of the uncertainty related to the value of their collateral, such a perverse incentive may diminish the recovery of other stakeholders that stand to benefit if the Equipment Term Loan Lenders are over-collateralized.
A key component of the confusion regarding funding the chapter 11 cases is a general inability or unwillingness of the lenders to agree on how much each party needs to fund to keep the Debtors’ operations active to pursue a going-concern sale of the Company’s assets.
And so the debtors have proposed band-aid solutions including (a) consent to use cash collateral for only the next seven days with the hope of arriving at a resolution between the lenders (which has drawn objections) and (b) a 21-day sales process (provided there’s funding) to market test a stalking horse bid for a going concern sale of their (i) cementing business and (ii) portions of their fracturing business by an entity called TES Asset Acquisition LLC — an entity affiliated with one of the debtors’ sponsors, CSL Capital Management LP.
This one has a very short leash.
⛽️New Chapter 11 Bankruptcy Filing - Patriot Well Solutions LLC⛽️
And YET ANOTHER oilfield services company in bankruptcy. Colorado-based Patriot Well Solutions LLC provides coiled tubing, nitrogen & pumping services, wireline logging and perforating services and crane services to the oil and gas industry in North Dakota, Wyoming, Colorado and Texas; it filed its chapter 11 petition in the Southern District of Texas to pursue a sale of substantially all of its assets. Backed by White Deer Energy LP II and MBH Energy Resources LLC, the company was formed in early 2016. White Deer has committed to providing a $9.4mm DIP and will serve as the company’s stalking horse purchaser.
⛽️ New Chapter 11 Bankruptcy Filing - Permian Holdco 1 Inc.⛽️
Permian Holdco 1 Inc. and three affiliates (the “debtors”) filed chapter 11 bankruptcy cases in the District of Delaware. We know. It’s shocking. How in holy hell could a manufacturer of above-ground wellsite fluid containment and processing systems for oil and gas E&P companies be in trouble?!? 🥱🥱🥱
The debtors’ pre-pretition lender will serve as DIP lender and stalking horse purchaser, credit bidding the DIP amount ($5mm) and prepetition credit facility amount ($28.6mm) as appropriate/necessary.
Riveting stuff. 😴
The good news is that this is likely the last oil and gas related bankruptcy filing we’ll have to cover until, like, tomorrow.
We joke but the list of distressed oil and gas companies and servicers remains extremely long.
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve begun digging into “No Filter: The Inside Story of Instagram,” and have “A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation” next in the queue.
James Muenker (Partner) joined DLA Piper LLP from Neligan LLP.
Rod Olivero (Senior DIrector) joined Getzler Henrich from Loughlin Management Partners.
Patricia Fugée on her ascension to the position of Practice Chair for Bankruptcy, Financial Restructuring & Reorganization at FisherBroyles LLP.
Richard Shinder on the launch of his new investment banking advisory boutique, Theatine Partners.
Portage Point Partners is seeking highly driven managing directors across all regions to support its performance improvement, interim management and financial restructuring practice areas. Portage Point is a business advisory firm that partners with companies and their stakeholders during periods of transition, underperformance and distress. For more information, please visit here or contact us at firstname.lastname@example.org.
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