by Even the borrowed time might be running out for B. Riley, the boutique investment bank in the middle of the Conn’s bankruptcy, the sale of Badcock to Conn’s for stock, before that the acquisition of Badcock by the Franchise Group, and the move to take FRG private. Especially the move to take FRG private.
Yesterday, B. Riley let Wall Street know that it has been served a subpoena as part of the SEC’s widening investigation of Prophecy Asset Management and Brian Kahn, former CEO of FRG. The bounty of bad news also included announcements that B. Riley is suspending its dividend, that there will be again be a delay in its filing of results for the quarter ended June 30, and that, when it does file, the company likely will report second-quarter losses between $435 million and $475 million, or $14-$15 per share.
Given the scale of these losses, especially when considered in the context of reporting total cash and investments as of June 30 of $1.1 billion with approximately $2.16 billion of total outstanding debt, it is reasonable to question the viability of the company going forward.
Not surprisingly, share prices on B. Riley stock nosedived after the announcements, falling so precipitously that the Nasdaq suspended trading on the stock for part of the morning. The share priced ended the day $8.80 lower, dropping to $8.15 a share, the lowest share price in nearly a decade. Before Monday’s news, B. Riley stock had already lost 80% of its value since the end of 2021.
Tilting out of plumb?
As in a game of Jenga, the removal of one timber threatens to topple the fiscal structures of both B. Riley and FRG, or so it seems given the sizable numbers and the arrangements for collateral with some of both firms’ key lenders. That one timber? In perhaps the day’s biggest news, B. Riley warned of additional losses related to writing down a portion of its loan to Brian Kahn that he and his C-suite used to take FRG private. B. Riley loaned Kahn’s Vintage Capital more than $200 million against Vintage’s stake in FRG.
B. Riley said that in addition to posting quarterly losses of what could approach a half-billion dollars, the company plans to report a noncash markdown of $330 million to $370 million connected to its investment in and loans to Vintage Capital, the parent of FRG formerly controlled by Kahn, and to FRG. With a 31% stake, B. Riley is one of FRG’s largest shareholders.
According to reporting from Bloomberg, the SEC is “assessing whether [B. Riley] adequately disclosed the risks embedded in some of its assets” and is seeking information on “interactions between Chairman Bryant Riley and longtime business partner Brian Kahn.” Riley told investors on the call that he is “confident” that the investigation will show “that we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates.”
“Our second-quarter results were negatively impacted by noncash losses, the overwhelming majority of which relate to performance of our investment in Franchise Group and our Vintage Capital loan receivable, which is primarily collateralized by equity interests in FRG,” Riley said.
To secure a $600 million loan from Japanese bank Nomura, B. Riley put up $1.5 billion in assets as collateral, assets that included approximately $220 million in FRG shares and a $200 million loan to Kahn that was also secured by FRG stock, according to Bloomberg yesterday. With headwinds at retail and the stock received for Badcock from the now-bankrupt Conn’s change, FRG share prices have also plummeted, significantly reducing the value of that collateral.
FRG’s holdings include American Freight, Buddy’s Home Furnishings, Pet Supplies Plus and the Vitamin Shoppe. FRG sold Badcock to Conn’s in December after stripping Badcock of its assets during the two years it owned the home furnishings chain.
(Unaudited)
(Dollars in thousands)
Delay of game!
Monday’s announcement marks the third time this year that B. Riley has delayed filing its regulatory reports, missing deadlines for its annual report and quarterly 10-Q for the first three months of the year. In announcing the most recent delay, B. Riley cited the need for “extra time” to finalize the valuations of loans and investments. This is a problem when those valuations keep sinking.
Perhaps lost in the flurry of financial news was the declaration by B. Riley yesterday that efforts to explore “strategic alternatives” for its Great American Group division are “advancing.” Great American is handling the GOB sales for all 553 Conn’s and Badcock retail locations, GOBs that are set to wrap up by Halloween. B. Riley said earlier this year that it would consider a deal for Great American/B. Riley Retail Solutions, a division that also comprises the investment bank’s retail, wholesale and industrial-solutions services.
“We will continue to work towards maximizing value from our existing principal positions and positioning the firm to capitalize on opportunities presented to our core operating businesses,” Riley said.
Houston, we have a problem
Switching attention to the Conn’s bankruptcy, the new judge overseeing the proceedings, Jeffrey P. Norman, has appointed a committee to represent unsecured creditors.
Norman has replaced Alfredo R. Pérez as the presiding bankruptcy court judge, according to court documents.
The seven-member committee comprises Man Wah, Albany Industries, Samsung Electronics, Haier U.S. Appliance Solutions, NNN Reit, Store Master Funding and Instant Web. Man Wah is a Hong Kong-based upholstery source. Albany Industries is an upholstery producer based in New Albany, Mississippi.
According to court records, this committee serves as the fiduciary to the unsecured creditors they represent, giving them authority to investigate Conn’s, its business and its financial affairs. “Committees have the right to employ legal counsel, accountants and financial advisers at a debtor’s expense,” according to the documents.
Conn’s and its affiliates filed for Chapter 11 bankruptcy protection on July 24.
The three secured creditors in the case are J.P. Morgan, the Stephens Group and B. Riley Financial. According to the July 23 filing, Samsung is owed about $21 million, LG Electronics $14 million and General Electric $13.3 million. A fuller list of the 30 unsecured creditors is posted here.
In a separate action, Conn’s has requested permission from the court to hire Sidley Austin as counsel. The next hearing in the Conn’s case is scheduled for Aug. 27.
At least three law firms have issued press releases announcing that they are investigating possible violations of securities laws by Conn’s and its affiliates, including B. Riley. These firms include Frank R. Cruz in Century City, California; Bronstein, Gewitz, & Grossman in New York-New Jersey; and the Schall Law Firm in Los Angeles.
The firms ask shareholders, investors and/or creditors to get in touch with them for possible participation as class action plaintiffs, according to those press releases. Bronstein, Gewirtz & Grossman is also investigating Arhaus in connection with that company’s IPO in November 2021.
The Conn’s share price as listed on the Nasdaq at the end of trading Monday was less than 3 cents ($0.025) after briefly trading in the afternoon at a penny. The 52-week high is $5.19. At the time of the bankruptcy filing, the share price had dropped to 35 cents.
According to Standard & Poor’s Market Intelligence, bankruptcy filings overall dropped slightly last month after a surge in June, a rise that matched the early days of the pandemic. July’s numbers mean bankruptcies are tracking for “one of the worst years for bankruptcies since 2020,” according to the report.
There were 50 bankruptcy filings in July, including Conn’s, which was one of the largest, down from 72 in June, according to numbers compiled by S&P Global Market Intelligence. The year-to-date total is 392 filings, compared to 407 through the first seven months of 2020, including 18 of more than $1 billion in reported liabilities.
Macro causes cited include higher interest rates, which remain at roughly 20-year highs, rising geopolitical uncertainty and a cooling economy.
