💰We Can Just Smell the Money💰

💊Update: How's GNC Doing? Part Two.💊

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We’ve been covering this dumpster fire since our inception. For those interested in revisiting the company’s (downward) trajectory, please feel free to revisit these hits:

Where do things stand now? Suffice it to say that this is the gift that keeps on giving.

On March 16, the company filed a notice of late filing instead of releasing its Q4 and annual financial results. In addition to slipping in the doozy that annual revenue declined by $280-290mm, they indicated:

“Management does not expect to have sufficient cash flows from operations to repay the indebtedness under the Notes or the Tranche B-2 Term Loan when they become due. Since the Company has not refinanced the Tranche B-2 Term Loan and it will mature less than twelve months after the expected issuance date of these consolidated financial statements, management has concluded there is substantial doubt regarding the Company's ability to continue as a going concern within one year from the expected issuance date of the Company’s consolidated financial statements.”

This is a wee bit problematic because, to refresh your memory, the company has a capital structure that is fundamentally mismatched in terms of maturities. The company has a $440mm term loan and ~$154mm of convertible notes. The converts mature this August and the term loan maturity is March 2021. GNC is required to reduce the converts to at least $50mm by this May to avoid a springing maturity on the term loan. With revenue being what it is, the source of liquidity to address this land mine — and service the business thereafter — is pretty limited.

And this is exactly what we predicted back in October when we wrote:

“The biggest issue the company confronts in the near term are those convertible notes...The company would need to take down $109mm of the converts — which, by the way, are now trading in the low 90s…read: not much discount now — and severely diminish liquidity in the face of a difficult competitive environment. Rock. Meet Hard Place.”

Anyway, back to present day. Upon the company’s latest announcement, the market responded accordingly. The term loan dipped down into the low 70s with a yield over 50%. The stock continued its downward move.

And S&P Global Ratings slapped a downgrade on the company indicating that “conditions for GNC are deteriorating substantially due to the coronavirus pandemic, the anticipated macroeconomic downturn, and the limited access to capital markets.” They took down the issuer rating to CC from CCC+. They anticipate that “a restructuring or default is inevitable barring unforeseen developments.

The company then rushed into damage control. Per Bloomberg:

The going-concern warning included in the filing is related to the timing of “‘significant maturities” over the next 12 months, Tolivar said. The company has the cash to handle the May maturity, but there isn’t enough certainty to predict cash flows through March of next year to cover the remaining debt absent a refinancing, Tolivar said.

Any refinancing, including the one GNC is currently working on with Citic Group Corp. and Harbin Pharmaceutical Group Holding Co., will address this concern, “rendering it moot,” she wrote.

Hmmmm. You can see this seesaw action in the price action on the notes.

Paying down the converts is not going to leave the business with a lot of wiggle room. COVID-19 can’t be helping matters — with respect to revenue generation, go-forward liquidity or refinancing risk. We reckon the earth is moving beneath GNC’s feet in real time.

We can’t wait to see what comes next.

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💰People Are Dying, But MONEY!! (Long Opportunism)💰

This is amazing:

Ok Braveheart.

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Many of you likely don’t know who Timothy Draper is. Draper is a long-time venture capitalist; he got in early on famed companies like Baidu, Tesla, Ring, Twitter, Twitch and Cruise Automation. Because of this, he is well-known in Silicon Valley and beyond. He’s very successful. And terribly misguided. Even after the house of cards formerly known as Theranos Inc. collapsed, he went on record saying that he would back Elizabeth Holmes again. Um, sure, okay.

Interestingly, much like distressed investors, he’s clearly licking his chops right now. This is an opportunity a lot of people have been waiting for for a long time. In his world, valuations have gotten so stretched: Draper wants to do deals at more reasonable levels. Similarly, there hasn’t been much to do in vulture investing land. That, we don’t need to point out, has taken a dramatic turn these last few weeks.

So don’t be surprised to see a private equity or distressed investing version of the above investor letter.

Moreover, don’t be surprised to see some tourists try to get into the direct lending space, targeting distressed companies. There’s no question in our minds that restructuring professionals will get calls from non-traditional players in distress.

For our part, if we had a distressed fund, we’d send out this missive to LPs and prospective LPs:

Dear Super-Patient-Through-a-12-Year-Bull-Cycle LPs and wonderful people who will become LPs (if you haven't lost your shirt in the markets over the past week):

If you are an LP in Fund V, holy sh*t you've been irresponsible because you know as well as we do that there has been absolutely nothing to do in distressed for years. You must be really frikken rich because you clearly didn't notice us collecting fees to NOT deploy your capital in anything short of destructive high yield names that recently went from par down to 60. Whatever, that's water under the bridge. We want you to know that, while other distressed funds recently folded up shop, we are in great shape as we approach the tempest. Seeing that the market was getting too hot (yield, baby yield) over the last 12 years, we have been quietly sending a strong message to our professionals-on-retainer that they ought to free up an extra 27 hours a day to help us analyze and navigate investment choices. We are very well situated to weather and conquer this storm. This is not our first regatta.

For those of you who are looking to commit to Fund VI, take a number b*tches. You should have stuck with us over the last 12 years rather than jumping ship and sticking your money in those passively-managed ETFs that have gotten ABSOLUTELY napalmed over the last week. If you're lucky enough for us to let you give us your money, you'll find that our experience will serve us well as we take full advantage of this incredible opportunity. We think you all know that our team thrives in a crisis. This is the time for the heroes to rise up and experience counts. A distressed investor who has not been through a financial crisis before is flying blind here. Spoiler alert: that's basically everyone. All of the pissant analysts at hedge funds, private equity shops, private credit firms, direct lenders, BDCs, and family offices were … maybe? … in high school during the GFC. They're probably already out of their hoarded quarantine toilet paper — sh*tting their pants all week as VIX spikes and the markets implode. We can smell their fear. In contrast, we know exactly what to do. We are the proverbial one-eyed women. Whatever the bloody hell that means.

This is the kind of time where a good distressed investor can get a future homerun for pennies on the dollar. Our deal flow machine is hitting on all cylinders, so we expect to see those golden fund opportunities. We even hired actual Americans to field incoming phone calls. Going full alpha, y’all! We can't wait to smoke all those CLOs!!

We will be holding rolling closes until we reach $550B in AUM or March 28, whichever is earlier. Get it while it's hot.

Cheers,

PETITION

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⛓Notable: What We're Reading (11 Reads)⛓

1. Amazon (Long Opportunism). The behemoth is reportedly sniffing around Fairway.

2. BDCs (Long Forced Selling). We’ve noted this topic many times before and now people are getting increasingly concerned. Fitch Ratings published a note last week indicating that BDCs “will feel increased stress due to levels of debt and loan covenants….” This is a loan turducken:

“Most of these BDC funds are levered up, perhaps forcing them to break covenants,” the executive said, citing loan covenants, a promise in a bond issuance that requires borrowers to meet certain criteria. “And when loan covenants are broken, BDCs become forced sellers of assets. This is not a great market to be selling into. Can you imagine holding the debt of restaurants or energy companies now? That’s not a great outlook.”

Not sure if this is a head fake or not but certain BDC managers are putting money where their mouths are.

3. CMBX (Long Patience). We’ve been writing about “The Big Short” mall trade for years now and the CMBX6 short is a wildly popular topic on Twitter. The adherents are getting good news these days. Here is the FT noting who is taking it on the chin on this trade these days:

More than two dozen funds managed by AllianceBernstein have sold about $4bn worth of protection against mortgages owed by American shopping centres and other commercial borrowers. Retail sceptics, including the veteran investor Carl Icahn, have wagered that mall owners will be unable to meet their debts. The derivatives bet is based on the so-called CMBX 6 index of mortgage-backed securities, which has a large exposure to retail. Its junk-rated BB tranche has fallen 25 per cent in the past fortnight, indicating higher expectations of default, as one major shopping centre operator closed all its properties and another moved to reassure investors about its financial strength. AllianceBernstein’s $29bn American Income Portfolio is down 15 per cent since the beginning of March, having written $1.9bn of protection on CMBX 6, while some of the group’s smaller funds have higher concentrations. 

4. Coal (Long Oddities). With oil and gas getting destroyed recently, coal is now the priciest fossil fuel. Meanwhile, Halliburton Co. ($HAL) came right out and said what we all know about fracking:

“Wall Street is shut to the industry,” Lance Loeffler, chief financial officer at Houston-based Halliburton, said during the webcast. “There is no more lifeline. Financial markets aren’t lending their support.”

5. DTC (Short Ad Spends). Shocker! DTC companies are tightening their belts even as ad pricing decreases on the major platforms. Speaking of ads, the one from Coca-Cola ($KO) above is brilliant.

6. Junk Bonds. S&P predicts the default rate will hit 10% within the next 12 months.

7. Mobile. AppAnnie measures the impact of the coronavirus on the mobile economy.

8. Private Equity Marks (Long Horsesh*t). Here, the Institutional Investor highlights the energy space and points out how quarterly private equity portfolio value “marks” reflect a type of optimism typically more associated with Silicon Valley than Texas. The piece features a cameo by Riverstone Energy Ltd. (LON: $RSE), a private equity firm with public and private funds (and, by extension, different time horizons for “marks”).

9. Retail (Long Mischief, Short MSCHF). The latest evolution in retail is so cool that we feel like poseurs just writing about it.

MSCHF is what would happen if you took peak-Upworthy’s knack for virality, 4chan’s irreverent meme culture, and generation Twitter’s attention span, added a tablespoon or three of marketing buzzwords and some venture funding, and then shook the resulting concoction as hard as you possibly could. Pour out the resulting elixir and serve it up in a Brooklyn speakeasy in a faux-vintage whisky tumbler shaped like Mark Zuckerberg’s head, and you’ve got MSCHF. Or something that approximates it.

10. Shale (Short Harold Hamm). We couldn’t agree with this statement, from Bloomberg’s Liam Denning, more:

The shale oil boom of the past decade (and natural gas before that) has come with a hefty dose of moral hazard built on various assumed market puts.

11. Texas (Short Oil & Gas). Texas law firms are on a hiring spree for bankruptcy talent. Because, like, there’s nothing sexier than serving as local counsel to the Yankees up north (just calling it like we see it, folks).

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.


💰New Opportunities💰

CAC Specialty, an integrated specialty insurance brokerage and investment banking firm, is looking for an associate or advisor to join its Special Situations Group, a unique practice of restructuring professionals who focus on insurance solutions for distressed and bankrupt companies.  The ideal candidate will be an associate-level or equivalent restructuring professional (lawyer, financial advisor, investment banker, etc.) who is intelligent, organized, a quick-learner, personable and entrepreneurial.  Interested candidates should email careers@cacspecialty.com

McDonald Hopkins LLC, through its Chicago office, seeks an energetic and ambitious associate to join its Business Restructuring Services Department.  The ideal candidate will have up to 4 years of law practice experience; intelligence, drive, creativity, and adaptability; as well as an interest in bankruptcy and restructuring matters.  Interested candidates should apply here.

Looking for quality people? PETITION lands in the inbox of 1000s of bankers, advisors, lawyers, investors and others every week. Email us at petition@petition11.com to learn about posting your opportunities with us.


Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.