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).

A great money-making ETF vessel is closing

Retail holders of the TVIX exchange-traded product were getting ripped off by institutional investors for years. Sadly this product, which has a market capitalization of $1.2 billion dollars (and a management expense ratio of 1.65%, so not a trivial money-maker for the issuer) will cease trading on a public exchange on July 10. The notes themselves will still exist, but operate in a “wind-down” state which means that there is going to be quite a bit of havoc in terms of its market value vs. the underlying index it is supposed to track.

TVIX leveraged its asset value into futures contracts of the two front-end months of VIX. As of June 23, 2020, 79% of its notional value was in July VIX futures and 21% in the August month. This gyration of selling the short-month and longing the second month was an excuse for institutional shareholders to siphon money from ETF holders that were silly enough to hold onto it for more than a one day period. Incidentally, other futures-linked ETFs (e.g. commodity ETFs such as USO) exhibit the same characteristics.

To put an amount on this, at a VIX value of 34, to maintain a double exposure to $1.2 billion notional value of volatility, the TVIX fund would have had to hold about 55,700 contracts of July VIX futures, and 14,800 contracts of August VIX futures. 111,000 futures contracts in July traded today.

The effective closure of the TVIX ETF, which was the largest volatility ETF, might work for the benefit of other volatility ETFs. It might also increase the volatility of volatility futures (wrap your head around that one).

My guess is that Credit Suisse is getting skittish on this product blowing up on them in a catastrophic manner.

Evening Finance with Sacha, Episode 5

Late Night Finance with Sacha, Episode 5

Date: Thursday, June 25
Time: 6:00pm, Pacific Time *** NOTE NEW TIME
Duration: Projected 1 hour.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: I’m going to be giving some quarter-ending commentary, a selection of economic statistics, and then opening it up for very general Q&A on any topic. I’m guessing the commentary will go for about 10-15 minutes and the Q&A will fill up the rest of the time, until one hour is consumed or nobody has any questions.

Q: Why are you doing this?
A: Continuing my experimentation in video broadcasting. Who knows, I might learn something from you as well.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: I can hardly manage a mailing list without breaking my own website, what makes you think I will spam you? No, if you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.

Q: Is there a limit to the people that can participate?
A: Zoom limits me to 100. I really hope the number isn’t higher than 10.

Q: Will there be some other video presentation in the future?
A: Yes.

Making sense of central bank information

The federal reserve’s balance sheet is telling of where monetary policy is going:

(You can view the longer term chart here)

It peaked on June 10th and the next week’s update (June 17th) showed a minor contraction.

From the last interest rate announcement, we had the following implementation note:

* Increase the System Open Market Account holdings of Treasury securities, agency mortgage-backed securities (MBS), and agency commercial mortgage-backed securities (CMBS) at least at the current pace to sustain smooth functioning of markets for these securities, thereby fostering effective transmission of monetary policy to broader financial conditions.
* Conduct term and overnight repurchase agreement operations to support effective policy implementation and the smooth functioning of short-term U.S. dollar funding markets.
* Conduct overnight reverse repurchase agreement operations at an offering rate of 0.00 percent and with a per-counterparty limit of $30 billion per day; the per-counterparty limit can be temporarily increased at the discretion of the Chair.
* Roll over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and all principal payments from holdings of agency CMBS in agency CMBS.

Things are continuing, but monetary injection is not going to be the rocket ship that it was. The 3 trillion dollars of liquidity thrown into the system will have to take its time to transmit into the real economy (if indeed, it does at all).

I will point out that during the 2008-2009 economic crisis, essentially the same response was there – the primary liquidity injection was done in the 4th quarter of 2008, but it took some time from 2009 onwards in order for stock prices to really jump up. All analogies have different variables at play, and this is most certainly not the 2008-2009 economic crisis (nor the great depression) so again, the playbook here is going to be quite different.

I’ll also point out that the Bank of Canada is getting into the business of inflating its own balance sheet, albeit not nearly at the pace that the Federal Reserve has (even adjusting for the relative sizes of the countries).