In early November 2019, Sequential Brands Group , Inc. (SQBG) reported earnings, held a Conference Call and filed a 10-Q. As usual, and despite widening losses and the absence of a permanent CEO and the recent announcement by the Board of its intention to explore strategic options, the tone of management remained upbeat. Here’s an extract of what acting CEO and Chairman William Seedler said on the CC:
“While we’re in the final stages of our CEO search, I’m pleased to fill in and join today’s call with Peter. The executive team has been hard at work executing on the plan to best position Sequential for long-term success…
First, the management team remains focused on driving revenue growth across the portfolio. …Second, we are well underway to rightsizing the cost structure of the business post the sale of Martha Stewart, which includes a significant reduction of our expenses. As management previously outlined, we expect an operating expense base of approximately $30 million before minority interest starting next year. This new optimized operating expense base reflects a significant reduction to the company’s current overhead, including corporate head count, SG&A and headquarter-related expenses. To that end, we’ve made significant progress on the sublease front. … We expect these savings to drive a significant and immediate margin improvement as we head into 2020. Third, we recently amended our lending agreement with KKR, which further improves our liquidity and cash flow and demonstrates the continued support of our lenders. With no upcoming debt maturities, we believe that the company has ample runway to focus on driving the business forward”.
We remain concerned nonetheless as Adjusted EBITDA in the latest quarter was $13.2mn, just covering interest of $13.0mn. Debt to EBITDA annualized was 8.3x… In fact, even debt to REVENUES is 4.4x ! Most importantly, liquidity, as per the 10-Q, includes just $5mn in cash and $24mn of availability under the company’s Revolver. Yet, last quarter Sequential registered ($18mn) in negative cash flow from continuing operations.
Frankly, we’ve been expecting “something to happen” at Sequential for months, since our first report in April of this year. We continue to rate the company CCR 4 (Worry List) and BDC exposure (concentrated in the FS-KKR group) huge at $292mn. Our jaundiced view is that the proverbial can is getting kicked down the road, judging by a second amendment to the lenders loan agreement in so many years. A bankruptcy filing could affect a whopping $281mn of BDC debt from 4 funds (one of which is Apollo Investment or AINV). That’s about $30mn of annual investment income at risk of – at least – interruption. We’re loath to add the credit to our Bankruptcy Imminent List given both that Sequential has survived for longer than we expected and the optimistic tone of the Chairman and the fact that there are only 6 weeks left in the current quarter. We’ll shortly see if we have become too lax in our assessment. In any case, it’s hard to imagine Sequential getting through another year without a bankruptcy or major restructuring event. As we are talking about the retail sector here – in an indirect way – it’s hard to see how the company or its lenders (who also own its almost worthless stock) come out of this undamaged. Unfortunately, neither AINV nor FSK even mentioned the company in their most recent Conference Calls, according to our review of the transcripts.