💥Who Wants to Buy Some Guns and Blow Stuff Up?💥
Remington Outdoor 22s, Rosehill Resources = Failed SPAC
|Jul 29|| 4|
🔥New Chapter 22 Bankruptcy Filing - Remington Outdoor Company Inc.🔥
What a wild ride.
Alabama-based Remington Outdoor Company Inc. (along with 12 affiliated debtors, the “debtors”) filed its second chapter 11 bankruptcy in 28 months (the first filing, the “chapter 11” in the District of Delaware and this filing, the “chapter 22” in the Northern District of Alabama) and we’re entirely convinced that they waited four months just to avoid the dreaded PETITION “Two Year Rule” violation.
Outside of the two-year parameter or not, it’s clear now that this quote in the press release announcing the … cough, cough … “successful” emergence from the first bankruptcy was complete and utter horsesh*t:
“It is morning in Remington country,” said Anthony Acitelli, Chief Executive Officer of Remington. Mr. Acitelli continued, “We are excited about the future – producing quality products, serving our customers, and providing good jobs for our employees.”
Post chapter 11, the debtors stumbled out of the gate. In their just-filed bidding procedures motion (spoiler alert: this is a “sale case”), the chapter 22 debtors acknowledge that they still had a number of issues immediately upon emergence from the first cases:
Although the Prior Cases restructured the balance sheet, the Debtors emerged from the Prior Cases with an elevated level of inventory and a wide range of brands that extended the Debtors beyond their core focus. Most importantly, the unfavorable business trends continued after exit from the Prior Cases. (emphasis added)
Wait. What??! What “unfavorable business trends” are they referring to?
In February 2018, in “Is that a Gun in Your Pocket or...? (Short #MAGA!!),” we offered up a PETITION-drafted First Day Declaration in advance of the chapter 11 filing that, mockingly, answered this question. We wrote:
Murica!! F*#& Yeah!!
Remington (f/k/a Freedom Group) is "Freedom Built, American Made." Because nothing says freedom like blowing sh*t up. Cue Lynyrd Skynyrd's "Free Bird." Hell, we may even sing it in court now that Toys R Us has made that a thing.
Our company traces its current travails to 2007 when Cerberus Capital Management LP bought Remington for $370mm (cash + assumption of debt) and immediately "loaded" the North Carolina-based company with even more debt. As of today, the company has $950mm of said debt on its balance sheet, including a $150mm asset-backed loan due June '19, a $550mm term loan B due April '19, and 7.875% $250mm 3rd lien notes due '20. Suffice it to say, the capital structure is pretty "jammed." Nothing says America like guns...and leverage.
Shortly after Cerberus purchased the company, Barack Obama became president - a fact, on its own, that many perceived as a real "blowback" to gun ownership. Little did they know. But, then, compounding matters, the Sandy Hook incident occurred and it featured Remington's Bushmaster AR-15-style rifle. Subsequently, speeches were made. Tears were shed. Big pension fund investors like CSTRS got skittish AF. And Cerberus pseudo-committed to selling the company. Many thought that this situation was going to spark "change [you] can believe in," lead to more regulation, and curtail gun sales/ownership. But everyone thought wrong. Tears are no match for lobby dollars. Suckers.
Instead, firearm background checks have risen for at least a decade - a bullish indication for gun sales. In a sick twist of only-in-America fate, Obama's caustic tone towards gunmakers actually helped sell guns. And that is precisely what Remington needed in order to justify its burdensome capital structure and corresponding interest expense. With Hillary Clinton set to win the the election in 2016, Cerberus' convenient inability to sell was set to pay off.
But then that "dum dum" "ramrod" Donald Trump was elected and he enthusiastically and publicly declared that he would "never, ever infringe on the right of the people to keep and bear arms." While that's a great policy as far as we, here, at Remington are concerned, we'd rather him say that to us in private and declare in public that he's going to go door-to-door to confiscate your guns. Boom! Sales through the roof! And money money money money for the PE overlords! Who cares if you can't go see a concert in Las Vegas without fearing for your lives. Yield baby. Daddy needs a new house in Emerald Isle.
Wait? "How would President Trump say he's going to confiscate guns and nevertheless maintain his base?" you ask. Given that he can basically say ANYTHING and maintain his base, we're not too worried about it. #MAGA!! Plus, wink wink nod nod, North Carolina. We'd all have a "barrel" of laughs over that.
So now what? Well, "shoot." We could "burst mode" this thing, and liquidate it but what's the fun in that. After all, we still made net revenue of $603.4mm and have gross profit margins of 20.9%. Yeah, sure, those numbers are both down from $865.1mm and 27.4%, respectively, but, heck, all it'll take is a midterm election to reverse those trends baby.
So, we'd rather "blow up" the capital structure, eliminate $700mm in debt, and start fresh. So, that's what we're going to do. And if you have a problem with it, allow us to remind you that we are armed to the hilt. We've got the lenders putting $145mm of fresh capital into this thing. The ABL lenders will be refinanced-out and the term lenders will get 82.5% of the company and some cash. The third lien noteholders will get the remaining 17.5% of equity, a "brass"-full of cash and some 4-year warrants to capture some upside. You know, in case Trump doesn't win re-election in 2020. Gotta preserve that upside potential. And if anyone DOES have a problem with it...well...let us assure you (looking down at pocket): we're NOT happy to see you.
When the company filed the chapter 11 a month later, our sarcasm proved justified. The company confirmed what we said. We wrote:
Indeed, our mockery of the change in tone from President Obama to President Trump was spot on: post Trump's election, the company's inventory supply far exceeded demand. The (fictional) threat of the government going house-to-house to collect guns is a major stimulant to demand, apparently. Here is the change in financial performance,
"At the conclusion of 2017, the Debtors had realized approximately $603.4 million in sales and an adjusted EBITDA of $33.6 million. In comparison, in 2015 and 2016, the Debtors had achieved approximately $808.9 million and $865.1 million in sales and $64 million and $119.8 million in adjusted EBITDA, respectively."
But … but … you read the quote in the press release right? Once those chapter 11 cases were confirmed and the debtors emerged, it was morning in Remington country baby (wherever the f*ck that is)! The debtors had a significantly reduced capital structure…
…and a fresh start! So what the bloody hell is going on here?!? In the chapter 22 papers, the debtors note:
The Debtors appointed a new chief executive officer, chief financial officer, and chief operating officer in 2019. After these appointments, the Debtors undertook an analysis of their strategic priorities, various cost-cutting measures, and financing alternatives. The Debtors initiated substantial inventory reductions and sought increased profitability via continued improvements in operational efficiencies, growth in international and dealer sales channels, and growth in defense and law enforcement channels.
Despite the Debtors’ efforts, which resulted in significantly improved efficiencies and savings, their financial performance continued to deteriorate, owing in large part to the inability to purchase raw materials at the required level to grow revenues. At the conclusion of 2019, the Debtors had realized approximately $437.5 million in total net sales and an adjusted EBITDA of $(74.7) million.
Oh, it gets better:
The Debtors also continued to face liquidity pressure and were increasingly challenged to meet the collateral base floor requirements under the Priority Term Loan Facility. That limited availability of the credit line and triggered an obligation to post cash collateral in the amount of any difference between the Debtors’ borrowing base and the collateral base floor. In February 2020, the Debtors negotiated an amendment to the Priority Term Loan Credit Agreement that reduced the collateral base floor by $7.5 million and deferred a $5 million amortization payment for a month and a half, but the amendment did not provide a permanent liquidity solution.
What. The. Actual. F*ck.
To understand just how colossal a miss this all is, let’s take a look at the projections the debtors filed with their chapter 11 disclosure statement:
These guys cleared just over half — that’s right, just over half — of what they were projected to in ‘19. Homeboys had too much inventory and “initiated substantial inventory reductions.” Guess what happened next? THEY NEEDED MORE INVENTORY (Petition Note: you can’t make this sh*t up).
The COVID-19 pandemic has recently sparked increased demand for the Debtors’ core products. The Debtors, however, have been unable to meet such demand because of (i) preexisting low inventory levels, (ii) the need to suspend operations temporarily to respond to the pandemic, and (iii) insufficient liquidity to fund raw material purchases needed to scale up production. As a result, the Debtors’ liquidity remains challenged.
Sh*t got so bad, these caricatures had to pull this stunt:
To preserve liquidity, the Debtors deferred payment of the firearms and ammunition excise tax under 26 U.S.C. Section 4181 (the “Excise Tax”) in compliance with the CARES Act.
Let’s take stock for a second. Everyone — like, literally, everyone — in the country seems to be preparing for a post-election civil war. Sh*t. Our parents could never figure out how to program a VCR or Facetime the grandkids but they just applied for gun licenses (PETITION Note: sadly, we’re not kidding. We are absolutely petrified). And yet the debtors were in no position to seize the moment and rack up gun sales amidst insatiable demand! Is there any wonder why we’re talking about a chapter 22?? Here is NPR reporting — just two weeks ago — about a rise in gun ownership:
Fears over the pandemic and protests are driving millions of Americans to buy guns at a record pace. And nearly half of them appear to be first-time gun owners.
David Chipman is a former special agent with the Bureau of Alcohol, Tobacco, Firearms and Explosives who is now with Giffords, a gun violence prevention group. The U.S. hit a monthly record for gun sales in March after the virus outbreak, he says.
And so, given this mess, the debtors engaged in a marketing process in late 2019. The debtors note that, come March, COVID-19 threw the process for a bit of a loop but it had received “…a proposal by an entity to purchase the Debtors’ businesses as a going concern (the “Potential Bidder”).” We love how they try to be discreet about this considering 28348393489583358398919849 publications already acknowledged who the Potential Bidder might be. Spoiler alert: the Navajo Nation. Here, five days ago from The Wall Street Journal:
Remington Arms Co.’s discussions with the Navajo Nation over a potential bankruptcy sale of the firearms manufacturer have fallen through, leaving the company still searching for a buyer and struggling with debt, people familiar with the matter said.
The Navajo Nation, a territory with roughly 175,000 people across parts of the Southwest, had been in advanced talks regarding a deal in which it would acquire Remington following a near-term bankruptcy filing, before the nation’s governing body decided not to move forward, one of the people said.
And so this happened:
The Debtors and the Potential Bidder’s representatives negotiated a final purchase agreement and debtor in possession financing agreement on or about June 18, 2020, which remained subject to final approval by the Potential Bidder’s regulatory and legal oversight. Among other things, the negotiated transaction provided for the assumption by the buyer of many ordinary course pre-petition liabilities including taxes and trade accounts payable. While the negotiated transaction received certain of the required regulatory approvals, the transaction with the Potential Bidder became the subject of public reports, and final approval by the Potential Bidder’s governing bodies expected in mid-July 2020 was not completed within the timeframe necessary to move forward with the transaction. The Company and the Restructuring Committee concluded that they could no longer wait to see if the Potential Bidder could successfully complete the governance approval process, whether based upon the negotiated transaction or some modification of that agreement. (emphasis added)
Still, as of the petition date, the Potential Bidder remains in play. As do “at least” four other potential purchasers who have submitted marked-up copies of a form asset purchase agreement. Why skip out on an opportunity to profit off of the first civil war in 160 years? Who wouldn’t want to make some cash money off of these:
Due to the demand, the debtors very well may have a stalking horse purchaser lined up soon. And if not for all of the assets, then separately for its firearms and ammunitions businesses. They hope to have an auction on September 8th and a sale hearing on September 10th. We can’t wait to see how this plays out.
One additional note:
The Big Banks
One of the more amusing parts of the chapter 11 filing was the fact that, despite lots of chatter at the time about big banks shying away from guns — they ultimately financed the exit ABL facility! At the time we wrote:
Beginning what could become a widespread financial squeeze on gun manufacturers, Bank of America says in a statement to Axios that it is reexamining its relationship with banking clients who make AR-15s.
Riiiiiight. Well, $BAC is the prepetition agent to the company’s asset-backed revolver loan and has agreed to be the agent to the company’s Debtor-in-Possession credit facility too. That facility was approved yesterday by the bankruptcy court. It has taken an allocation of the DIP which rolls into an exit credit facility which means that $BAC intends to have a post-bankruptcy relationship with the company. Note Bank of America's piece here:
Note also Wells Fargo Bank's ($WFC) piece. Now, presumably, the banks will syndicate (some of) their portions out but, well, clearly they have no qualms having exposure to this gun manufacturer.
Except, it turns out they did have qualms! Almost exactly one-year post-emergence, the debtors refinanced their Exit ABL into their $75.5mm Priority Term Loan Facility (see chart again above), thereby freeing the big banks of their hypocrisy and putting Minneapolis-based Whitebox Advisors at the top of the capital structure.
⛽️New Chapter 11 Bankruptcy Filing - Rosehill Resources Inc. ($ROSE)⛽️
Stop us if you’ve heard this before: Rosehill Resources Inc. ($ROSE), a Texas-based independent E&P company focused, via a fellow-debtor operating company, Rosehill Operating Company LLC (“ROC”), on the Permian Basin (and, more specifically, the Delaware Basin), filed for bankruptcy because of the usual suspects that literally every oil and gas company blames. Seriously, it’s like everyone is just copying and pasting Arya Stark’s hitlist at this point: “Vladimir Putin, Mohammad Bin Salman Al Saud, COVID-19, the competition, too much debt, etc. etc.” Never mind: we’ll stop ourselves. We’ve all heard this before. Many. MANY. Times.
Speaking of the debt, here is what the capital structure looks like and this is what will happen to it pursuant to the prepackaged plan of reorganization that’s already on file:
That should be pretty self-explanatory but there are a few things to highlight:
The $235mm exit RBL actually represents a decreased borrowing base. The original RCF had a maximum commitment of $500mm with a most recent borrowing base of $340mm. That borrowing base amount created a deficiency/liability the company struggled — when coupled with service obligations related to the RCF, secured notes and preferred stock — to make whole.
The DIP will run at 8% PIK which is better than the 10% cash pay under the secured notes.
In terms of operations, Rosehill operates or owns working interests in 133 oil and gas wells of which 128 are producing or are capable of production. Here’s what that production looks like:
Is that interesting? Not particularly. We include it only to demonstrate that we’re not the only ones who are capable of highly unfortunate and irritating typographical errors. More interesting is the fact that Rosehill earned $302.3mm in revenue in ‘19 against $239mm of operating expense. Revenue was basically flat from ‘18 whereas the company’s operating expense increased. On the plus side, the company had some favorable hedge agreements in place which, upon monetization, resulted in $87.6mm in proceeds that the company ultimately used to paydown its RCF immediately prior to the filing. Actually, who are we kidding? That’s not particularly interesting either.
Given how boring this bankruptcy is, the last thing we’ll mention — again because we and the entire world of finance seems to be obsessed with the topic — is that the company emanated out of … wait for it … wait for it … a SPAC!! The company was originally incorporated in 2015 as a SPAC under the name KLR Energy Acquisition Corporation — sponsored by the KLR Group’s Edward Kovalik, Stephen Lee and Reid Rubinstein — the business corporation that ultimately became Rosehill Resources Inc. occurred in April 2017.
The rest, as they say, is now history.
Perhaps we should start taking a running tally: new SPAC IPOs vs. old SPACs that have now filed for chapter 11 bankruptcy!
Benjamin Godbout (Director) joined Carl Marks Advisors from Summit Investment Management.
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