🌧April Suffers No Fools🌧

April was a busy bankruptcy month but something tells us it won’t hold a candle to what’s coming for the industry in May. There were smatterings of small retail filings and a pair of massive oil and gas bankruptcies (Whiting Petroleum Corporation, Diamond Offshore Drilling Inc.). TMT as a category continues to hold steady with telecom set to fill a lot of restructuring firm’s coffers (Frontier Communications Corporation, Speedcast International Limited). The big winners of the month: the District of Delaware, Kirkland & Ellis LLP, A&M and FTI Consulting Inc. (tough call as they both handled mega deals), Evercore Group LLC and Moelis & Company (same), and Prime Clerk LLC which continues to monopolize the biggest deals.

Religionless Millennials + Private Equity = Short David’s Bridal Inc.

Another Private Equity Backed Retailer is in Trouble

Per the Pew Institute:

In the past 10 years, the share of U.S. adults living without a spouse or partner has climbed to 42%, up from 39% in 2007, when the Census Bureau began collecting detailed data on cohabitation.

Two important demographic trends have influenced this phenomenon. The share of adults who are married has fallen, while the share living with a romantic partner has grown. However, the increase in cohabitation has not been large enough to offset the decline in marriage, giving way to the rise in the number of “unpartnered” Americans.

Maybe the rise in co-habitation among romantic partners and the decline in marriage has something to do with the decline of importance of religion. Note this chart:

That said, the decline seems to have more to do with millennial attitudes towards religion AND the institution of marriage than anything else.

What does this have to do with any of you? Well, it seems that attitudes towards marriage are creating some retail distress. In June, Alfred Angelo filed for chapter 7 bankruptcy — much to the chagrin of countless brides-to-be who were left uncertain as to the delivery status of their ordered gowns. Take cover…insert peak Bridezilla.

David’s Bridal Inc. swooped in and tried to save the day. Because HOT DAMN retail is cold today. Customer acquisition needs to come from somewhere. And David’s Bridal needs all the help it can get.

The Conshohocken Pennyslvania-based retailer is the largest American bridal-store chain, specializing in wedding dresses, prom gowns, and other formal wear. The company has approximately 300 stores nationally (and declining). It also has approximately $1 billion of debt hanging over its balance sheet like an albatross. Upon information and belief (because the company is private), the capital structure includes a $125 million revolving credit facility, an approximately $500 million term loan due October 2019, and $270 million of unsecured notes due October 2020. The notes are trading at roughly half of par value, reflecting distress and a negative outlook on the possibility of full payment. Justifiably so. With EBITDA at roughly $19 million a quarter, the company appears 9.5x+ leveraged. And you thought YOUR wedding dress was expensive.

Why so much debt you ask? Well, c’mon now. Surely you’ve been reading us long enough to know the answer: private equity, of course. The company was taken private in a 2012 leveraged buyout by Clayton, Dubilier & Rice. (Petition Note: Callback to that Law360 article where private equity lawyers and bankers alleged that PE firms take too much flack…HAHAHA).

In light of recent trends and the debt, Moody’s recently downgraded David’s Bridal to “negative,” noting:

"‘In our view, this is a reflection of the intense competition in the sector and casualization of both gowns and bridesmaids dresses," Raya Sokolyanska, a Moody's analyst, wrote in a note to investors.”

Competition? You’ve got that right. H&M is all over this space too — grasping at straws to salvage its own languishing prospects.

Consequently, Reuters reported that the company is in talks with Evercore Group LLC ($EVR) to help it address its balance sheet. If hired, we think it would be hilarious if Evercore included this Marketwatch article entitled, “5 brides share their financial wedding regrets” in its pitch to lenders. Choice bit,

“Clare Redway, a marketing director based in Brooklyn who married in June 2016 said she wishes she spent more on the wedding dress, or at least found a more unique one. ‘I just got mine on sale at David’s Bridal,’ she said.”

That ought to stir up some concessions.

Q1 2018 Preliminary Review

Long Duopolies = Long Kirkland & Ellis & Weil Gotshal & Manges

As we think about duopolies today, Google ($GOOGL) and Facebook ($FB) come to mind. The two large companies - recent controversies notwithstanding - represent a significant amount of annual ad revenue generation and have increasingly siphoned off market share and revenue from other advertising mediums; in other words, they have dominated the advertising industry. But this isn’t the kind of duopoly that we’re focused on today.

Over last week’s brief holiday respite, we set out to examine restructuring activity in Q1 2018. We wanted to answer this question: who is dominating the restructuring industry? Well, Captain Obvious: Kirkland & Ellis LLP and Weil Gotshal & Manges LLP.

We admit: we’re not surprised by this. We’ve been paying attention. In Q1 2018, Kirkland & Ellis LLP filed EXCO Resources Inc., PES Holdings LLC, Cenveo Inc., iHeartMedia Inc., and the Toys R Us “propco.” Weil Gotshal & Manges LLP filed Fieldwood Energy LLC, Tops Holdings II Corp., Claire’s Stores Inc. and Southeastern Grocers. That’s a meaningful and significant share of the large bankruptcy filings in the quarter. The industry is definitely a two-horse race when it comes to law firms and debtor filings. If we could long these firms, we would.

But, there are some changes afoot. Quintessential creditor-side firms are encroaching on the debtor shops and vice versa. Milbank Tweed Hadley & McCloy LLP filed Remington Outdoor Company and Akin Gump Strauss Hauer & Feld LLP filed Rand Logistics Inc. and FirstEnergy Solutions Corp. In turn, Weil Gotshal & Manges LLP seems to be positioning itself to take a chunk of revenue out of other firm’s debtor-side deals where it can — by sitting in other seats at the table. Weil represents both the potential buyer and the private equity sponsors in iHeartMedia Inc. and the ad hoc first lien group in Cobalt International Energy. Said another way, while Akin and Milbank are no longer creditor-only shops, Weil is no longer a debtor-shop only.

Getting even more granular, Weil Gotshal - along with Evercore Group LLC ($EVR) and FTI Consulting Inc. ($FTI) - have dominated the beleaguered grocery space. After working on the A&P Chapter 22 (which, for all three firms, was a round trip), the trifecta secured both Tops’ and Southeastern’s chapter 11 filings.

Meanwhile, DLA Piper LLP seems to be securing a foothold in the healthcare space. It was involved in Adeptus Health last year and recently filed Orion Healthcare Corp. and 4 West Holdings LLC. This is a firm to watch as people suspect more healthcare flow on the horizon.

Southeastern Grocers = Latest Bankrupt Grocer (Long Amazon/Walmart)

Another day, another bankrupt grocer.

Yesterday, March 27 2018, Southeastern Grocers LLC, the Jacksonville Florida-based parent company of grocery chains like Bi-Lo and Winn-Dixie, filed a prepackaged bankruptcy in the District of Delaware. This filing comes mere weeks after Tops Holding II Corporation, another grocer, filed for bankruptcy in the Southern District of New York. Brutal.

In its filing papers, Southeastern noted that, as part of the chapter 11 filing, it intends to "close 94 underperforming stores," "emerge from this process likely within the next 90 days," and "continue to thrive with 582 successful stores in operation." Just goes to show what you can do when you aren’t burdened by collective bargaining agreements. In contrast to Tops.

Also unlike Tops, this case appears to be fully consensual. It appears that all relevant parties in interest have agreed that the company will (i) de-lever its balance sheet by nearly $600 million in funded liability (subject to increase to a committed $1.125 billion and exclusive of the junior secured debt described below), (ii) cut its annual interest expense by approximately $40 million, and (iii) swap the unsecured noteholders' debt for equity. The private equity sponsor, Lone Star Funds, will see its existing equity interests cancelled but will maintain upside in the form of five-year warrants that, upon exercise, would amount to 5% of the company. 

Financially, the company wasn’t a total hot mess. For the year ended December 2017, the company reflected total revenues of approximately $9,875 million and a net loss of $139 million. Presumably the $40 million cut in interest expense and the shedding of the 94 underperforming stores will help the company return to break-even, if not profitability. If not - and, frankly, in this environment, it very well may be a big "if" - we may be seeing this trifecta of professionals (Weil, Evercore, FTI Consulting) administering another Chapter 22. You know: just like A&P. To help avoid this fate, the company has secured favorable in-bankruptcy terms from its largest creditor, C&S Wholesale Grocers, which obviates the need for a DIP credit facility. C&S has also committed to provide post-chapter 11 credit up to $125 million on a junior secured basis. 

Other large creditors include Coca-Cola ($KO) and Pepsi-Cola ($PEP). Given, however, that this is a prepackaged chapter 11, they are likely to paid in full. Indeed, a letter sent to suppliers indicates exactly that:

In addition to its over-levered capital structure, the company has a curious explanation for why it ended up in bankruptcy: 

"The food retail industry, including within the Company’s market areas in the southeastern United States, is highly competitive. The Company faces stiff competition across multiple market segments, including from local, regional, national, and international supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and “big box” retailers, and independent and specialty grocers. The Company’s in-store delicatessens and prepared food offerings face competition from restaurants and fast food chains. The Company’s primary competitors include Publix Supermarkets, Inc., Walmart, Inc., Food Lion, LLC, Ingles Markets Inc., Kroger Co., and Amazon."

"Adding to this pressure is the recent growth in consumer demand for a “gourmet” shopping experience, complete with offerings of natural, organic, and gluten-free foods. Some of the Debtors’ competitors have expanded aggressively in marketing a range of natural and organic foods, prepared foods, and quality specialty grocery items. The Debtors have been at a disadvantage to companies that have the financial flexibility to devote greater resources to sourcing, promoting, and selling the most in-demand products."

Sound familiar? Here is what Tops said when it filed for bankruptcy:

"The supermarket industry, including within the Company’s market areas in Upstate New York, Northern Pennsylvania, and Vermont, is highly competitive. The Company faces stiff competition across multiple market segments, including from local, regional, national and international supermarket retailers, convenience stores, retail drug chains, national general merchandisers and discount retailers, membership clubs, warehouse stores and “big box” retailers, and independent and specialty grocers. The Company’s in-store delicatessens and prepared food offerings face competition from restaurants and fast food chains. The Company also faces intense competition from online retail giants such as Amazon."

"Adding to this competitive pressure is the recent growth in consumer demand for a “gourmet” shopping experience, complete with offerings of natural, organic, and gluten-free foods. Some of the Debtors’ competitors have expanded aggressively in marketing a range of natural and organic foods, prepared foods, and quality specialty grocery items. The Debtors have been at a competitive disadvantage to companies that have the financial flexibility to devote greater resources to sourcing, promoting, and selling the most in-demand products."

At least Weil is consistent: we wonder whether they pitch clients now on cost efficiencies they derive from just copying and pasting verbiage from one company's papers into another...? We also wonder whether the billable hours spent drafting the First Day Declaration here are less than they were in Tops. What's your guess? 

Anyway, there's more. No "First Day Declaration" is complete without a reference to Amazon ($AMZN). Here, though, the company also notes other competitive threats — including Walmart ($WMT). In "Tops, Toys, Amazon & Owning the Robots," we said the following,

In Bentonville, Arkansas some Walmart Inc. ($WMT) employee is sitting there thinking, “Why does Amazon always get the credit and free publicity? WTF.” 

Looks like Weil and the company noticed. And Walmart got their (destructive) credit. Go $WMT! 

Other causes for the company's chapter 11 include food deflation of approximately 1.3% ("a drastic difference from the twenty-year average of 2.2% inflation"), and reductions in the Supplemental Nutrition Assistance Program (aka food stamps). And Trump wasn’t even in office yet.

Finally, in addition to the store closures, the company proposes to sell 33 stores pursuant to certain lease sale agreements it executed prior to the bankruptcy filing. 

Will this mark the end of grocery bankruptcies for the near term or are there others laying in wait? Email us: petition@petition11.com.