A Busy Day for Bankruptcies

The U.S. Bankruptcy Court in Delaware saw three mid-market Chapter 11 filings on Monday. Is it the start of a flood?
Vincent RyanMarch 12, 2019
A Busy Day for Bankruptcies

Are highly stressed companies starting to run out of financial runway? The U.S. Bankruptcy Court in Wilmington, Delaware, saw three prominent Chapter 11 bankruptcy protection filings on Monday, all three from organizations operating in very distressed industries.

CTI Foods, Z Gallerie, and publisher F+W had a couple of other things in common: all three had been fighting to stay alive for a while, and management had made some strategic missteps in trying to turn things around.

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Are CTI, Z Gallerie, and F+W the first trickle in a soon-to-be flood of filings?

According to S&P, the default rate of corporate junk bond issuers will remain at about 2.3% (trailing 12 months) in March. There have been 19 defaults in 2019. The retail and restaurants sector leads with four of those.

Here’s some more information about the three Chapter 11 filings:

Z Gallerie

Business: Fashion and art-conscious home decor retailer

Circumstances: Second trip through bankruptcy court since 2009

Plans: Z Gallerie plans to close 17 underperforming stores (out of a total of 76), revamp distribution operations, focus on its online platform, and address its portfolio of leases. It is aiming for a sale or a debt-for-equity exchange.

Reasons: Store expansions that didn’t meet performance targets, new distribution facility that disrupted operations and increased costs, and failure to invest quickly enough in its online e-commerce platform.

Debt load: $138 million

Performance: $200 million in sales, 2018; same-store sales increases for the holidays.

Owner: Private equity firm Brentwood Associates acquired a 70% stake in 2014

Funding: A $28 million loan from KeyBank NA

F+W Media

Business: Publisher of Writer’s Digest, Sky & Telescope, Popular Woodworking, and other niche magazines

Circumstances: F+W defaulted on its credit facilities in spring 2017 and executed a debt-for-equity swap.

Plans: F+W is seeking buyers for its two key segments: its books business and its communities division, which includes print and digital media operations for hobbyists interested in collectibles, the outdoors, woodworking, and horticulture. Sold off $8.2 million in assets last year. Efforts to renegotiate its leases have been unsuccessful.

Reasons: Falling subscriber base, declining advertising revenues, expensive technology contracts needed for the move to selling merchandise online, customer service issues from flawed website technology, increased spending on merchandise inventory and staffing while revenues fell.

Debt load: About $105 million

Performance: $89.7 million in sales in 2018

Owner: Lenders

Funding: $8 million from existing lenders, led by Fortress Investment Group

CTI Foods

Business: Supplier of dry goods, like ready-to-eat pork and poultry, to food services and restaurants

Circumstances: Prepackaged bankruptcy in which private equity owners turn over full control to first-lien lenders

Plans: The restructuring proposal would give 97% of CTI to top lenders owed $347 million; second-lien creditors would get a 3% stake (owed $140 million) if they vote in favor of CTI’s preferred terms.

Reasons: Declining market share as new competitors moved into the protein processing industry, falling sales as the company made long-term investments in food safety, “inefficiencies” in the business of Liguria Foods, which CTI acquired in 2016.

Debt load: $580.5 million

Performance: Sales fell by 13.6% from 2016 to 2018

Owner: Goldman Sachs and Thomas H. acquired CTI Foods in 2013

Funding: $155 million in debtor-in-possession financing