by Checking in on the many complex bankruptcies besetting the industry
As we sit down for some Thanksgiving turkey, I’m grateful I own no stock in Franchise Group, Conn’s, Badcock or Big Lots. It’s been a busy four months or so of complex bankruptcies and a collective bloodbath for the furniture sector.
Let’s start with Big Lots, which just added another 19 stores to the list of closings that now pushes almost 340 locations. This bankruptcy seems to be proceeding the most predictably, which includes the court’s approval Friday for the sale of basically all assets to Nexus Capital Management. This was expected, and it sets up a closing in early December.
Big Lots filed for Chapter 11 protection in early September.
Franchise Group
The last time we checked in on the Franchise Group bankruptcy, the proverbial ducks appeared to be in a row. The first day hearing, however, sent feathers flying, and it’s been a contentious proceeding since. Basically, the first two hearings pitted the first lien lenders against at least a subset of the second lien lenders.
Reading through some of the now-230 filings in the docket as of late Friday, the picture that emerges has the big lenders, which include HPS Investment Partners, HG Vora Capital Management, Arena Capital Advisors and Garnett Station Partners, trying to move forward as de facto owners of what’s left of FRG just as quickly as Judge John T. Dorsey will allow them. These senior lenders hold approximately half of FRG’s $2 billion in debt. FRG owes its top 50 creditors $64.5 million.
In the other corner of this particular heavyweight fight are junior lenders led by Freedom VCM and Freedom VCM Interco, the holding companies prior to bankruptcy. Freedom VCM was formed to take FRG private in August 2023, according to an SEC filing. The holds are motioning to slow this freight train down long enough to do some due diligence and, again, with Dorsey’s approval, get the “debtors-in-possession” to provide the necessary documents for discovery. This ad hoc group of second lien lenders is represented by Thomas Lauria, a Florida-based bankruptcy specialist with experience in some big-name bankruptcies, including those of Hertz, the Texas Rangers baseball team, Six Flags and Chrysler.
Lauria’s law firm, White & Case, contributed via its DIP objections to a first day hearing that dragged on for nearly seven hours. Seven billable hours. These objections resulted in a raft of concessions by the first lien lenders at a second hearing on Nov. 6, according to the court documents. Fees, interest rates, rolls and backstops all were adjusted to potentially leave more in the kitty for junior lenders.
What’s intriguing and a bit murky is just who Freedom VCM and Freedom VCM Interco are, or who they comprise from a fiduciary perspective. At the time of Freedom VCM’s formation, the principal owners by virtue of investment in it in order to buy back FRG were B. Riley (31%) and Brian Kahn (32%). If I am reading the afore-mentioned SEC filing correctly, the balance is or was held by Andrew Laurence, Eric F. Seeton, Andrew F. Kaminsky and Kenneth Todd Evans, all officers with FRG at the time of the buyback. They are listed as “consortium members.” Laurence is CEO of FRG now, named to that post when Kahn stepped down in January this year.
So, as we carve up the turkey, the question now is how Dorsey will handle the junior lenders’ motions at the next creditors meeting scheduled for 10 a.m., Dec. 10, particularly because the holiday interruption this week further complicates the discovery process, as Lauria points out in his emergency motion to extend the deadline for objections (document 195). Those objections are due by 4 p.m., Dec. 3. These junior lenders have made it clear that they are not happy with the lack of transparency thus far in the proceeding.
Dorsey has already approved the DIP to borrow up to $250 million more from the first lien lenders to continue operations among all its remaining brands except American Freight, which, lacking a buyer, has been shut down. And he dismissed objections from junior creditors, Pacific Investment Management and Irradiant Partners, which combined hold $115 million in loans, according to filings.
Thus, the freight train is still moving, just not quite as fast as perhaps the senior lenders had hoped, and FRG brands, including Buddy’s Home Furnishings, can continue to operate during this critical holiday shopping season.
I’m also thankful that I’m not Dorsey, who is wrangling a case with 53 FRG affiliates (the debtors) and a list of unsecured creditors that runs about 430 pages. I wouldn’t want to deal with the lease agreements that intertwine this bankruptcy with that of Conn’s, which through its Badcock acquisition inherited lease agreements negotiated when Badcock was owned by FRG. These agreements widen the net of potential litigants to hundreds of landlords and property managers.
Conn’s
Speaking of Conn’s, which filed its Chapter 11 in late July, the court in Houston authorized the extension for submission of a reorganization plan as motioned by the debtors-in-possession. The new timeline sets a Feb. 18 deadline for the plan and April 21 for a decision on acceptance or rejection.
The DIP argued that the case is complex, and for reasons that go far beyond the implications of the FRG bankruptcy, this is a fair description. These reasons include $530 million of debt as of the petition and unsecured obligations to vendors, contractual counterparties, and thousands of employees and independent contractors.
(I’m thankful I’m not clerk of the Houston bankruptcy court. The Conn’s docket now numbers 1,142 documents.)
Life of Riley
I’m also thankful for obvious reasons that I own no shares in B. Riley Financial, a stock that has lost approximately four-fifths of its value this year during what has been a bullish 11 months for the market overall.
The junior lenders in the FRG case are not surprisingly concerned about their chances of recovery dwindling yet further, and a wild card in that risk management is B. Riley and the various investigations and litigation looking into B. Riley’s involvement in FRG the past few years. Based on statements from B. Riley, it certainly seems as though the company has little expectation much will be salvaged from its stake in FRG.
At the same time that emails were flying between White & Case and the DIP law firm of Willkie Farr & Gallagher, B. Riley was telling the investment community that it needs yet more time to file its quarterly results for the second quarter ended waaaaay back in June. Now, to be fair, this latest delay is at least partially explained by the FRG debacle, because B. Riley has to write off basically all of its sizable investment in that company. Already, B. Riley has stated that losses for the quarter ended in September likely will end up in the range of $270 million to $280 million. In its eventually filed annual report for 2023, B. Riley put the fair value of its investment in Freedom VCM to be $287 million.
Another likely reason for this latest delay is the bookkeeping related to the sale of B. Riley’s Great American Group, the company that handled the Conn’s and Badcock closings, to Oaktree Capital. This very complicated financial arrangement last week mutated into a joint partnership in a new Great American entity that joins B. Riley and Oaktree as owners.
But just like yams, no matter how you slice them, these repeated filing delays aren’t savory. The notice two weeks ago that the firm would fail to meet the SEC’s deadline for the third quarter is the fourth time this year the company has announced a delay. Years only have four quarters! (For those scoring at home, the delays were for fiscal 2023, first quarter 2024, second quarter and now the third quarter.)
Look both ways!
“Despite the negative headlines, we are in far better shape than folks give us credit for,” co-founder Bryant Riley wrote in a Nov. 4 email to employees, as reported by Bloomberg. “We are turning a corner.”
FRG is the corner B. Riley will have to navigate. Quoting again from Riley’s email to employees, he said, the “dynamic of FRG’s bankruptcy is a confluence of events that ultimately derailed our original investment thesis.”
The “dynamic” Riley is referring to is the oft-cited decline in consumer spending since the pandemic, “the fallout and uncertainty from the Prophecy scandal and the related federal investigation into Brian Kahn,” and the also oft-cited “economic headwinds” produced by high interest rates and rising inflation. Riley said in the memo that his company has “for now, been distilled by many outside the firm into a single investment,” according to reporting in Bloomberg, a reference to FRG and Freedom VCM.
The Great American venture announced last Thursday is mostly a ratification and acknowledgement of how intertwined Oaktree and B. Riley already were even before the deal. According to B. Riley, the Oaktree partnership nets it $235 million to pay down its debt while allowing it to retain “significant equity” in the business.
Will it work? Well, if it doesn’t, the new Great American will know what to do. It’s a GOB specialist! And irony is something for which we can all be thankful. That and pie. Happy Thanksgiving to all.
