Distressed Credit Digest

May 31, 2020

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Distressed/High Yield Watchlist

Tracking 266 credits from 152 companies
Click here for the full watchlist

Top Movers

Bottom Movers

Highlights

American Airlines (AAL 5.00 ’22) traded up 13 to 59 as the airline industry saw strength for the second week in a row. 

‣ All cruise lines credits saw massive gains this week. Royal Caribbean (RCL 3.700 ’28 & RCL 7.500 ’27) higher by 10-13.  

Ahern Rentals (AHERN) bounced off its lows and traded up 15 points to end the week back in the mid-40s.

‣ The week following the Hertz bankruptcy filing, both distressed car rental credits (Hertz – HTZ & Avis Budget Car – CAR) were stronger due to other travel related buying. Hertz (HTZ) unsecured notes traded up 4 points to 17.50 while Avis Budget Car (CAR) unsecured notes gained another 10 points across the capital structure. The CAR bonds are now yielding between 10-12%.

‣ Recently defaulted retail credits (Neiman Marcus -NMG and JCPenny – JCP) saw their notes trade down by 2-3 points to low single digits.

Party City (PRTY) jumped 11 points after it announced its intent to exchange their unsecured notes for a combination of stock, first lien notes, second lien notes and rights to purchase a new 15% first lien note.

 


“Nobody Has More Party for Less” than Party City bondholders

Party City has not given its stock and bondholders a reason to party over the past year. The company ended 2019 with its stock down 76.5% as it saw EBITDA drop 39% from the previous year due to soft Halloween sales and helium supply problems.

The first half of 2020 has been no better. As social distancing has become the normal, party and gatherings have disappeared. Not such a great thing if you are in the business of selling balloons and party supplies.

In March, the stock hit a low of $0.27 cents ($25M market cap) which was down 88% for the year. The stock is currently down 45% YTD after the recent rally. With a current market cap of roughly $120M, the company continues to face liquidity issues and struggles with its debt.

Many investors expected Party City would become another casualty of the Covid-19 epidemic and ultimately be forced into bankruptcy. Before the announced exchange, both senior bonds (PRTY 6.125% due 2023 and PRTY 6.625% due 2026) were trading between 4-6 cents on the dollar as bondholders feared little to no recovery value.

Buying Time with a Debt-Exchange

In an attempt to reduce its total debt, the company announced a debt exchange deal on Friday (May 29 2020) . If accepted, it will decrease total debt by $450 million. Due to pre-negotiations with certain bondholders,  52% of the combined $842M senior notes have already agreed to the terms.

In order for this exchange to go through, the company will need to get over 98% of the bondholders to agree. Before going into greater detail about the terms of the exchange, let us take a quick overview of the company and its structure.

Overview of Company

https://www.koyfin.com/snapshot/s/PRTY

Party City Holdco Inc., through its subsidiaries, designs, manufactures, sources, and distributes party supplies in the United States and internationally. The company operates in two segments, Retail and Wholesale. It offers paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts, and stationery. As of August 8, 2019, the company operated approximately 900 specialty retail party supply stores, including franchise stores throughout North America under the Party City and Halloween City names, as well as e-commerce Websites principally through the domain name PartyCity.com.

Historical Graph of Party City

Financial Overview

https://www.koyfin.com/fa/fa.fh/PRTY
https://www.koyfin.com/fa/fa.pl/PRTY
https://www.koyfin.com/fa/fa.solv/PRTY

Corporate Structure

Stockholders own a holding company called Party City Holdco.
 
Party City Holdco has $842M of long-term debt via the issuance of two senior notes (6.125% due 2023 and 6.625% due 2026). The holding company has no operating assets or operations.
 
Party City Holdco owns 100% of PC Nextco Holdings, LLC (“PC Nextco”).
 
PC Nextco owns 100% of PC Intermediate Holdings, Inc. (“PC Intermediate”).
 
PC Intermediate owns 100% of Party City Holdings Inc. (“PCHI”).
 
PCHI conducts the majority of the operations and has about approximately $863M of long-term debt (ABL Facility and Term Loan) as well as $720M of long-term operating leases.
 
Shown below is a visual representation of the corporate structure as well as where each investment sits.

Little value to work with

Before the exchange, PRTY bonds were trading below their annual coupon payment. If an investor purchased bonds at 6 cents on the dollar and the company was able to remain solvent, the bondholder would recoup his entire upfront investment in less than one year.
 
Why is that so?
 
These bonds currently sit behind $863M of secured debt (ABL Facility and Senior Term Loan). In the event of a bankruptcy, higher priority debt get repaid first. If there is more value after the higher priority debt gets paid, then the next highest priority debt get paid. And so on until it gets to the lowest (shareholders).

As seen in the capital structure table below.  The market value of the secured debt is currently around $431M or 50 cents on the dollar. Making it harder to extract value in a bankruptcy for the senior notes.

Current Capital Structure
 

Debt-Exchange into balloons?

Now back to the proposed debt exchange deal announced on Friday. First off the company plans to create a newly formed limited liability company, direct wholly owned by Anagram International.
 
Who is Anagram? Anagram is wholly owned by Party City Holdings (PCHI). They are a world innovator and leader in foil balloon manufacturing. They claim to have 50% global market share of all balloon sales.
 
As of 2019, Anagram generated $153M in sales down from $190M in 2018. Its adjusted EBITDA was $25m in 2019 down from $49 the previous year. This balloon business accounted for 6.5% of total revenues and 11% of total adjusted EBITDA.
 
The main reason for the drop in 2019 was due to its high correlation between its business and helium supply. The company forecasts to recover to 2018 levels by 2023/2024.
 
 

The Exchange Details

Bondholders (if there is full participation) are to receive the following
 
– Ownership of 19.9% of the outstanding common stock of PRTY.
 
– $100M of new 10% Senior Secured Notes due 2026 issued by the new LLC under Anagram International
 
– $185M of new variable rate Senior Secured Notes due 2025 issued by Party City Holdings (PCHI)
 
– rights to purchase a pro rata portion of $50M (out of $100M) new 15.00% Senior Secured Notes due 2025 (issued by Holdco)
 
 

Breakdown of the value for bondholders

This exchange provides bondholders a path to full recovery if PRTY stock recovers to $4.85. If the company is unable to complete a turnaround, the most that can be recover is ~34%.
 
After the exchange details were released on Friday, the bonds traded up 10 points to 16. If the stock holds up in the next few weeks, there can be further strength in the bonds as a good part of the exchange value is dependent on the stock.

 

Full Recovery Breakdown 

Current Valuation Breakdown
(estimated values of new debt)

Conclusion

It seems like this exchange will get done as it provides the best option for bondholders. It gives the company additional time to hopefully stage a recovery during the 2nd half of 2020. If it is successful, bondholders will be partying with stockholders as they both celebrate the new year.

 


I am Rich, the co-founder of Koyfin. As a former distressed high-yield trader now designer/developer, I wanted to share some thoughts and observations I see in the distressed high-yield corporate bond market. During my trading days, I shared a daily distressed digest with clients containing trading color and news. Now, I hope to share them with you. Feel free to follow me on Twitter @koyfinTrader as well as share any feedback. My DMs are always open.