🔥The "Weil Bankruptcy Blog Index," CMBS and how Nine West is the Gift that Keeps on Giving🔥

We’re still clearing through some year-end stuff here at PETITION. This edition will conclude our review of 2020 (parts I and II here and here). Before we get there, this was obviously a momentous week. The Democrats took Georgia and by extension the Senate, the Capitol fell to a siege, unemployment figures underwhelmed (140k job losses with leisure and hospitality getting f*cking napalmed), Saudi Arabia unexpectedly cut oil output, and a new virulent COVID strain is now apparently running wild within our borders. Good times. It’s almost enough, all in, to make us nostalgic for 2020.

Oddly, the stock market took in all of the above and be like 🤷‍♀️: it had an up week! Mania is sweeping the markets to the point of Elon Musk becoming the richest man on the planet, Bitcoin breaching $40k, sponsors issuing SPACS called Queen’s Gambit Growth Capital (sounds fake: it’s not), and corporates…well…

It was a given that 10y yields would break above 1%. What worries me is that corporates are rushing to issue new debt as they see yields rising. In only 2 business days $40bn of new bonds were issued-and the pipeline is getting bigger. Are companies seeing their refinancing risk? pic.twitter.com/QXZnKTPqF5

— Althea Spinozzi (@Altheaspinozzi) January 6, 2021

Maybe. Probably not. More likely? They’re seeing the market swallow up ridiculously low rates. This week US high yield rates hit a fresh all-time low. Spreads are back near pre-crisis levels:

Demand is insatiable.

Back in October the PETITION team took a look at (but ultimately opted not to write about) Urban One Inc. ($UONE), a Maryland-based media operator focused on the African-American community. Our interest derived from an 8-K indicating that UONE (a) anticipated COVID-19-induced revenue decreases might trip financial covenants, (b) initiated wholesale cost-cutting initiatives, and (c) drew down $27.5mm on its ABL facility. Thereafter, the company commenced an exchange offer and consent solicitation pursuant to which it exchanged $347mm 7.375% senior secured notes due 2022 for new 8.75% senior secured notes due 2022. The company also pulled off a $25mm at-the-market equity offering. In other words, both the debt and equity markets were willing to play ball and play for some sort of social justice-driven pull-through of demand that would improve business fundamentals.

And as it turns out, the company did pull forward demand — more election related than anything:

"The radio segment benefited from unprecedented levels of political advertising spending targeting African American voters.  Bolstered by this revenue, we expect our radio segment fourth quarter revenue to be down a low single-digits percentage year over year, a material improvement from second quarter's decline of -58.4% and third quarter's decline of -31.9%," says CEO Alfred C. Liggins III.

In a pre-market announcement on Thursday, the company indicated that consolidated net revenues for FY20 would be down roughly 13.7-14.6%. But Q420? They reported a net revenue increase of between 3.9-7.7% and adjusted EBITDA up 49-56.2%. That’s all the capital markets needed to see.

On Thursday the company also announced a private offering of $825mm 2028 notes to pay off the relatively new 8.75% ‘22s, the stub 7.375% 22s, and loans outstanding under two separate credit agreements. The issuance priced inside of initial 7.5% talk and got done at 7.375%. Notably, the 8.75% ‘22s were trading below par as long ago as, uh, *checks calendar*, Tuesday (they’re now above 100). This is not the most, uh, optimistic issuance we’ve seen of late — we’ll leave that to the airlines and movie theater chains — but it does highlight the forgiving nature of capital markets: that’s quite a dramatic drop in rate mere months after a previous issuance. And let’s be clear: we’re talking about a company that is, in part, a radio station operator coming off a significant uptick due to election-related ads. But 🤷‍♀️. That really is the best way to describe all markets these days.

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How about the bankruptcy market? Epiq Systems Inc. released its 2020 bankruptcy filing statistics this week and “2020 had the lowest number in bankruptcy filings since 1986 with a total of 529,068 filings across all chapters.” Commercial chapter 11 filings were up 29% YOY but chapter 13 and chapter 7 filings decreased by 46% and 22%, respectively.

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Gearing Up for Auto Distress

Is Another Wave of Auto-Related Bankruptcy Around the Corner?

We take this break from your regularly scheduled dosage of retail failure-porn to introduce a topic we haven't addressed yet in detail: auto-related distress.

The auto narrative appears to change by the week depending on, uh, well, generally whatever Elon Musk says/tweets, so let's take a look at what's really been happening recently and filter out the hype (note: Tesla recently failed to deliver on production, lost key execs, and fired hundreds of people on Friday...draw your own conclusions...p.s. stock still going bananas): 

• Short Interest in Auto Parts Stocks. It has increased. This piece attributes this to Amazon's new foray into the car parts business. Is that really the reason why? 
• Sales. Car and light truck sales are trending downward. Auto loans that maybe - just maybe - jacked up sales are also on the decline. Mostly because default rates are going up. Here's a chart showing auto debt climbing as a share of household liability.
• Supply Chain Distress. Last year we saw DACCO Transmission Parts Inc. file for bankruptcy. During the Summer, Takata Inc. filed for bankruptcy (on account of a massive liability, but still) and Jack Cooper Enterprises Inc., a finished-vehicle logistics/transportation provider, reached a consensual agreement with its noteholders that kept the company out of bankruptcy court. For now. Then, a little over a week ago, GST Autoleather Inc. filed for bankruptcy, citing declining auto output. Is this the canary in the coal mine? Hard to say. Literally on the same day that GST filed for bankruptcy - again,citing declining auto output - General Motors, Ford and other OEMs reported the first YOY sales increase (10%), surprising to the upside. It seems, however, that the (sales) uptick may be artificial: in part, it's attributable to (a) Hurricane Harvey damage and mass vehicle replacement; and (b) heavy vehicle discounting. On a less positive note, Ford announced that it will beslashing billions in costs to shore up its financial condition; it also announced back in September that it would slash production at five of its plants. And General Motors Co. announced earlier this week that it would be idling a Detroit factory and cutting production. Production levels, generally, are projected to decline through 2021. Obviously, reduced production levels and idled plants portend poorly for a lot of players in the auto supply chain. 
• EV Manufacturing. There is increasing interest in investing in and developing the (electric) car of the future. And that includes major luxury car manufacturers like Mercedes-Benz and Audi. These manufacturers may just be putting the nail in the coffin for upstarts like Faraday Future, which barely seems like it can get off the ground.
• EV Manufacturing - Second Order Effects. Earlier this year we covered Benedict Evans' (now famous) piece on the second-order effects of the rise of electric and autonomous cars. Others, more recently, have been raising questions about what this electric-car future will look like. While others, still, are saying chill the eff out. We, rightfully questioned what would happen once electric cars gained greater traction given the relatively small number of components therein relative to the combustion engine vehicle. To point, Bloomberg writes, "After disassembling General Motors’s Chevrolet Bolt, UBS Group AG concluded it required almost no maintenance, with the electric motor having just three moving parts compared with 133 in a four-cylinder internal combustion engine." Whoa. That's a lot of dis-intermediated parts manufacturing. UBS also projects that electric vehicles will overtake gas and diesel cars by 2038 - with a rapid ramp up succeeding a slow build. 
• Charging Points. They've doubled in Germany and a plan is in place to get more super-chargers in place by 2020. Royal Dutch Shell announced on Thursday that it agreed to buy NewMotion, one of Europe's largest EV charging companies; it plans to deploy them at existing gas stations. All of this points to bullish views about EV adoption - worldwide. And we didn't even mention China, which is voraciously trying to curb emissions/pollution and go electric. 
• Increases. Range and prices. Anything that combats "range anxiety" will help adoption. Prices, however, still have to come down for electric cars to be competitive. 
• Derivative Distress. This was interesting: folks are concerned that autonomous cars may also mean the end of public radio. Will other players that benefit from captive car audiences, e.g., iHeartMedia Inc. and Sirius, also see effects? In all of iHeartMedia's discussions (see below), what are analysts assuming about the future of car ownership? About the rise of podcasts? 

To put the cherry on top, The Washington Post had a piece just this week asking whether 2017 will mark the end of the internal combustion engine. Once you add up all of the above? Well, it becomes clearer that restructuring professionals may have to re-acquaint themselves with auto distress strategies. Maybe that dude who was once the "gaming guy" who is now the "oil and gas guy" will have enough time to become the "auto guy."

Dov Charney = Bankruptcy Pro

This is a long holiday weekend in need of a longform beach read. So here is a recent piece about American Apparel's founder and iconoclast, Dov Charney. Why bother? Well, because Charney probably knows more about retail restructurings at this point than half of you. We kid, we kid. 

Anyway, trust us and take a look. The article demonstrates how in ten short years the retail space has dramatically changed. Charney expanded from a B2B wholesaler to a B2C brick-and-mortar destination in an astounding amount of time (sidenote: Charney's architect running the expansion was none other than WeWork co-founder, Miguel McKelvey). Will we ever see that level of retail expansion again? It doesn't seem likely. 

Otherwise, American Apparel's double vault into bankruptcy is well documented by this point. Charney tried to buy the company out of the first bankruptcy for $300mm; he was denied. He didn't try to buy it the second time which came a cold 6 months later and the company sold its intellectual property to Gilden Apparel for $88mm. Gilden then shut down the entirely of the retail footprint (and the company's Los Angeles warehouse). Now Charney is launching "Los Angeles Apparel" and going all Clint Eastwood on Gilden. We love a good showdown. 

If, at this point, you're thinking "This is my long holiday weekend and I don't want to stress out by reading something about that dumba$$, Charney," well, we get it. So, a few highlights to otherwise spare you:

Choice Quote #1: "...the private equity firms can't wait to get out. They want a pay day. They're not looking to hang around or create something unique, or win accolades for their creativity. They're measured by how much money they can extract from the business. They're not interested in the customer; it's not about authenticity." PETITION note: see, e.g., Payless Shoesource, rue21 Inc., Gymboree, Claire's Stores...arggh, you get the point. 

Choice Quote #2: "'The money's not talented...[t]he money doesn't create the value. Basically the hedge funds and the private equity firms - and it's not all of them - they hire these consulting firms. What these guys do, they just come in, they raid the company - basically the suits take over. But it hasn't worked out in fashion, as far as I can tell." PETITION note: see, e.g., Wet Seal, rue21, Gymboree, Claire's Stores...arggh, you get the point. Query also: which consulting firm is he referring to? Hmmm.

Choice Quote #3: "To avoid over-production, some of those smaller players go as far as crowdfunding their inventory, waiting for a minimum order from their customers before they even contemplate production...." PETITION Note: we've been wondering whether inventory-by-crowdfunding would become more of a trend. Significantly, Elon Musk has been doing that with new Tesla models: make an order and pay a deposit. He he can then know precisely how many new models to manufacture and project cash needs accordingly. Andreesen Horowitz folks cover this topic in this interesting podcast. Moreover, other big brands are using crowdsourcing for consumer product goods. Retail is a tough business these days: we wonder whether additional brands will deploy crowdsourcing to create awareness/buzz and manage inventory simultaneously. Stay tuned and watch this trend.

Want to tell us we're morons? Or praise us? Cool, either way: email us.