Distressed Digest

August 9th 2020

Currently tracking 228 credits from 136 companies.

If you wish to view the Distressed Watchlist within Google Sheets, please request access to it and I will shortly grant you access to it.

https://docs.google.com/spreadsheets/d/17CE82ulzQX9KuRBMBeWXdyyx6LSjXqdaTepEc27A-8s/edit#gid=1148751060


Leaders for the Week

Laggards for the Week


Highlights

  • American Airlines credit traded extremely well this past week. The AAL 11.75 ’25 new ****secured ****notes ended the week up higher by 7.75pts to 95.00 yielding 13.2% while the AAL 5.00 ’22 short-dated unsecured notes were higher by 5.50pts to 61.50 yielding 35.7%.

  • WeWork (WEWORK 7.875 ’25) traded at 70 for the first time since early March. The notes have doubled since hitting 35 in the beginning of April.

  • Mallinckrodt Intl stronger again this week. MNK 5.75 ’22 notes traded higher by 7.50pts to 25.50, up 15.50pts in 3 weeks since the $500MM block trade at 10. The MNK 10.00 ’25 notes also ended the week higher by 12pts to 80.00 yielding 16.25%.

  • Casino and gaming credits saw strength this past week. Buena Vista Gaming (BVGA 13.00 ’23) traded higher by 10pts to 85.00 yielding 20.6% while Golden Nugget (LNY 8.75 ’25) traded higher by 7pts to 60.00 yielding 22.2%.

  • Revlon Consumer Products (REV 5.75 ’21) continued to further deteriorate, trading lower by 4pts to 29.00.

  • AMC Entertainment (AMC) completed its debt exchange and reported slightly better than expected earnings this past week. AMC stock ended up 17.5% for the week while the small remaining AMC sub notes traded down into the low 20s. The first lien notes remain in and around 79.50 yielding 17.05%.

  • Frontier Communications (FTR 7.625 ’24) senior unsecured notes were active this week and traded higher by 5pts to 37.

  • CBL & Associates (CBL) senior unsecured notes remained unchanged in the low 20s after the company made its previously skipped interest payments, avoiding bankruptcy for a bit longer.


You’re Gonna Regret Borrowing All That Debt

Tailored Brands (formerly known as The Men’s Warehouse) filed a voluntary petition for reorganization under Chapter 11 earlier this month. As of February 2020, the company operated 1,450 stores under the Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank, and K&G brands. The CEO recently stated that the”unprecedented impact of Covid-19 requires us to further adapt and evolve” but the company was already in a slow steady decline since merging with Jos A Bank back in 2014.

The company entered into bankruptcy with a pre-negotiated plan of reorganization that is supported by the majority of its senior lenders. Under this plan, the senior unsecured notes and common stock are expected to receive no recovery.

Destruction of Shareholder Valuation since the Jos A Bank purchase

After the purchase of Jos A Bank, the newly purchased brand accounted for a third of total stores operated with approximately 20-25% of sales. The goal was to achieve synergies of $100-$150M annually by combining the businesses.

The Men’s Warehouse financed the $1.8B purchase by issuing $1,089M of term loans along with an additional $600M of senior unsecured debt. One year after the purchase, the company experienced a drop in revenues offsetting any planned synergies. The company once valued at a $3.17B market capitalization during the summer of 2015, quickly lost 80% of its value within the next six months.

https://koyfin.com/s/qRCJUmAZrD
https://koyfin.com/s/AnMb45YHfL
https://koyfin.com/s/jSyZ7y1bWa

Over the next 2-3 years, the company’s quarterly dividend, which yielded anywhere from 3-5%, helped to support the share price while investors waited for better times. After recording miserable financial results in 2019, the company was forced to suspend its dividend as they focused on reducing debt.

https://koyfin.com/s/eozDV2E9Ub

Cash Flow from Operations Disappears in 2019

While the company recorded $300M+ in cash flow from operations (CFO) in both 2017 and 2018, CFO decreased to ~$100M in 2019. During the height of Covid, cash flow from operations fell to negative $121M in 1Q 2020 (February 2020 – April 2020).

https://koyfin.com/s/GAAzJiilSD

Men’s Warehouse Senior Unsecured Notes

The company was proactive in reducing the amount outstanding of their 7% senior unsecured notes ($600M original), as the remaining balance was only at $173.8M at the start of this year. With a little less than 2 years until their July 2022 maturity, investors felt that the company could handle this maturity as reflected by the mid-90s trading price at the beginning of this year.

Men’s Warehouse (Tailored Brands) —- TLRD 7.00 ’22 (FINRA Trace)

Yet like many others this year, the pandemic caused a significant disturbance to the business. As of result, the unsecured notes which were trading in the mid 90s earlier this year are now expected to have no recovery value.

As shown below, Tailored Brands (TLRD) has historically traded 5-6x EBITDA and optimistic analyst estimate 2021/2022 EBITDA to be between $100-$200M. This still only values the business between $500M to $1B, which is not enough to fully cover the secured lenders (the new 100% owners of reorganized equity).

https://koyfin.com/s/6Y0cXBFdpd

Conclusion

While many retail companies can blame their woes on Covid, Tailored Brands’ balance sheet was over-levered and simply not healthy enough to handle any disruptions to its business. What could be more of concern for the future owners of Tailored Brands is how the pandemic could effect how many work.

Demand for business attire will surely be effected as many find themselves working remotely for the foreseeable future. Management claims a future with more focus on business casual attire will help. Yet, investors seem skeptical of this pivot for a brand that is well known for upscale dress.

The men’s wearhouse slogan may be “you’ll like the way you look”, but investors certainly don’t like the way the company’s future looks – “I guarantee it.”


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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.