Delphi Energy – proposed recapitalization

Delphi Energy (formerly trading as DEE, and with a second-lien secured note trading as DEE.NT) went belly-up into CCAA on April 14, 2020.

The last trade on DEE.NT was at 55 cents on the dollar before the company was delisted.

Today, we have the following proposed recapitalization plan:

The claims of creditors in respect of:

approximately $13.5 million outstanding under the Company’s debtor-in-possession interim loan financing secured by a Court-ordered priority security interest,

approximately $13.0 million outstanding under the Company’s senior credit facility secured by a first lien security interest, and

approximately $119.7 million outstanding under the Second Lien Notes secured by a second lien security interest,

will be settled in exchange for approximately 14.7%, 14.2% and 36.5% of the issued and outstanding voting common shares of a newly created class of shares of the Company (the “New Shares”), respectively, subject, in the case of the Second Lien Notes, to the Second Lien Opt-Out Election (as defined below);

Assuming a 100% recovery on the DIP financing, this works out to an equity valuation of $92 million. The second lien notes thus are looking at 28 cents on the dollar in the proposal, with the following alternate option:

Subject to the terms and limits set out in the Plan, beneficial holders of Second Lien Notes holding an aggregate principal amount of Second Lien Notes equal to or less than $200,000 will have the opportunity to elect (the “Second Lien Opt-Out Election”) to receive cash in the amount of $0.25 per dollar of outstanding principal amount of Second Lien Notes in lieu of the New Shares that they would otherwise be entitled to receive pursuant to the Plan; provided that, in the event that the aggregate of all payments pursuant to the Second Lien Opt-Out Election would exceed the aggregate amount of $1 million, such payment will be reduced on a pro rata basis so that total payments pursuant to the Second Lien Opt-Out Election do not exceed $1 million;

So their options are either 28 cents on the dollar (implied value) of equity, or a 25 cent on the dollar cash-out, or roughly half of the last trading price of the notes. It doesn’t look like there will be a Twin Butte Energy here!

Owners of Hertz stock should be aware that in the instance of Delphi Energy the proposal, if agreed upon, will rendered the common shares worthless.

The COVID quarter where everything gets written off

Most companies have a fiscal year corresponding with the calendar, and most of them will be reporting April to June results in the last week of July and in early August.

Q1’s results were in the onset of COVID-19, so results were only partially affected (the sanctions required due to the pandemic really only took effect in the middle of March).

Q2 will contain the full brunt of the economic consequences of COVID-19.

The results posted are going to be horrible for a lot of companies, especially on a GAAP basis. You’re going to see a whole bunch of write-downs of various assets that have been lingering on balance sheets for far too long, but Q2 will be the best time to formally impair them and get past mistakes out of the public consciousness.

The markets are not going to care. This has long since been baked in.

The next consequence of this is that you’re going to see headline computer generated metrics from company financial statements (price to earnings, EPS, etc.) over the next twelve months get wildly misstated due to the inevitable Q2 reporting of losses. This will also affect ROE/ROA, growth percentages, and almost anything relating to earnings in the calculation.

As a result, stock screens looking for value will be twisted unless if forward-looking adjustments can be made. A common forward-looking metric is “consensus analyst estimates”, but this figure is what an investor is looking as a rough short-term measuring stick in relation to the price the market is offering (indeed, if something looks ‘cheap’ solely on the basis of price to consensus analyst estimates, I’d view that much more as an alarm bell than a reason to buy).

The contamination of financial data coming from the COVID quarter will be the worst since the 2008-2009 financial crisis. While individual stock selection is always important, the COVID quarter should create an even better environment for stock selection than other times.

Tailored Brands: Not looking good

Tailored Brands (NYSE: TLRD), retailing as Moore’s in Canada, filed on Form 8-K that they were not paying their unsecured debtholders:

On July 1, 2020, The Men’s Wearhouse, Inc. (“Men’s Wearhouse”), a subsidiary of Tailored Brands, Inc. (together with Men’s Wearhouse, the “Company”), elected not to make the interest payment due and payable on July 1, 2020 of approximately $6.1 million (the “Interest Payment”) with respect to its 7.00% Senior Notes due 2022 (the “2022 Senior Notes”). Men’s Wearhouse has a 30-day grace period to make the Interest Payment before such non-payment constitutes an “event of default” under the indenture governing the 2022 Senior Notes (the “Indenture”). If an event of default under the Indenture occurs as a result of such non-payment, it would result in a cross-event of default under both the Company’s term loan facility and asset-based revolving credit facility (collectively, the “Credit Facilities”). Men’s Wearhouse has elected to enter into the 30-day grace period with respect to the Interest Payment. During the grace period, Men’s Wearhouse may elect to pay the Interest Payment and thereby remain in compliance with the Indenture.

On July 1, 2020, the Company made its scheduled interest payments required under the Credit Facilities and therefore, as of the date hereof, is current with respect to its interest and principal payment obligations thereunder.

Per their last financial snapshot, and 10-Q, it appears they have approximately $1.2-$1.3 billion in senior debt, coupled with $174 million in unsecured notes, which last traded at 7 cents on the dollar. The company itself, by virtue of drawing its asset-backed facility, has about $200 million in cash (and approx. $90 million in restricted cash) in early June.

It looks like they are engaging in a “Mexican Standoff” strategy that will not go very well for everybody involved – implicitly they are trying to get the unsecured noteholders to concede with the threat that they will go to zero in a Chapter 11 proceeding. The question is what price has been negotiated?

The company, similar to most other retailers, has massive lease liabilities and even if they resolve the unsecured debt situation, still has to face that challenge.

Dilution on interest payment election

Stuart Olson (TSX: SOX), for various reasons, is not in the greatest of financial health. They have $87 million in senior debt outstanding, and an unlisted debenture of $70 million. The company is currently cash flow negative and had to obtain a relaxation on their debt covenants due to COVID-19.

On Sunday they announced:

CALGARY, AB, June 28, 2020 /CNW/ – Stuart Olson Inc. (TSX: SOX) (“Stuart Olson” or the “Company”) announces that it will pay the $2,450,000 June 30, 2020 interest payment on its 7.0% Convertible Unsecured Subordinated Debentures (the “Debentures”) through the issuance of shares from treasury pursuant to the agreement of the holders of the Debentures and a corresponding supplement to the indenture for the Debentures. The shares will be issued at a 20% discount to the five day volume weighted average trading price of Stuart Olson’s shares ended June 29, 2020. The Toronto Stock Exchange has conditionally approved the issuance, subject to customary post-closing filings.

The 5-day VWAP puts them at 73.14 cent per share, or approximately 3.35 million shares to be issued for this interest payment, which means that whoever holds the debentures will own about 10.6% of the company. A pretty heavy price to pay for the remaining shareholders, but the alternative is even more glum – it all goes to the creditors. I’m somewhat surprised the shares didn’t trade lower today (no positions).