Great Atlantic Bankruptcy (GAP)

Before I begin, I need to correct something I wrote last night introducing the GAP bankruptcy: Rejected lease claims are unsecured claims in a bankruptcy. The GAP 2nd lien notes should be senior to these rejection claims. Chalk it up to lack to sleep. For you real bankruptcy buffs: 502(b)(6) of the Code sets damages at the greater of one year or 15% of the lease (not to exceed three years). Apologies on my part. Net/Net it helped the recovery of the bonds. To note, bonds are up 3-4 points today (went out the day 83-34/flat).

Now to the fun stuff: Great Atlantic announced its decision to file Chapter 11 in the Southern District of NY. To access the docket, you can go here: http://www.kccllc.net/APTea

Now, the DIP is definitely large - but the increased size is to account for taking out existing LOCs and pre-petition bank debt. The DIP will be structured as a $450M RC and a $350M term loan. Pricing is talked at L+750 with a 1.75% Floor. From the docket: "...to secure an $800 million debtor-in possession financing facility, consisting of (i) a $350 million term loan facility to refinance the Debtors’ prepetition senior secured credit facility and provide approximately $187 million in incremental liquidity and (ii) a $450 million revolving facility, including access to a $250 letter of credit sublimit and (b) grant adequate protection to the Debtors’ secured lenders." Essentially, this number was near the upper limit allowed under the pre-petition intercreditor agreement.

As noted in previous posts, one of the most important documents to get yourself associated with a new bankruptcy proceeding is the First Day Affidavit. You can find GAP's here: GAP's First Day Proceedings Affidavit.

A few interesting takeaways from the document:
  • "The Debtors’ primary retail operations consist of supermarkets operated under a variety of well-known trade names, or “banners,” including A&P, Waldbaum’s, SuperFresh, Pathmark, Food Basics, The Food Emporium, Best Cellars, and A&P Liquors. As of September 11, 2010, the Debtors reported total assets of $2.5 billion and liabilities of $3.2 billion. The Debtors currently employ approximately 41,000 employees. "
  • Points out three "significant legacy costs" - Dark store leases, an unfavorable supply agreement with C&S Wholesale (a high yield issuer itself), employee costs (pensions, high labor % of sales)
  • LTM Revenue: $8.4B, down from $9.5B in 2008 and $8.8B in 2009
  • LTM EBITDA and EBITDA Margin: $104M and 1.2% respectively, down dramatically from 2008 of $333M and 3.5% respectively.
  • 95% of employees under collective bargaining agreements (39 separate agreements)
  • Paid $1.4B for Pathmark in 2007
  • "The Debtors’ estimated dark store net rental expense will be $77 million in 2011 alone."
  • Cap Structure:
  • Sames Store Sales down 6.9% YTD
  • Cost Savings Efforts Paying Off: "These initiatives have already generated total cost savings of approximately $40 million on an annualized basis, including over $10 million in annual salary savings"
  • Really putting a lot of blame on C&S through this entire document.
  • $858M of NOLs and $121M in business tax credits
Will be a very entertaining case. Interestingly a few months ago, one Distressed Debt Investors Club member pitched the second liens as a long (they were in the high 60s at the time) right when another member pitched the unsecured bonds as a short. Been a tough ride for 6.75% of 2012:

We will continue monitoring the GAP bankruptcy - think this one could get interesting.


Anonymous,  12/14/2010  

I also noticed the issue with the suppliers mentioned in the affidavit, and as a result I put together an ROIC profile of publicly traded supermarkets in the United States (Ruddick, Ingles Markets, GAP, Village Super Markets(ShopRite Banner), and Kroger). It is my personal feeling that most research tends to ignore this type of analysis, but I believe it can be incredibly insightful. The comps aren't perfect here as firm size varies, but I think the inferences that can be made here are at least directionally correct.

My ROIC analysis focused on NOPLAT divided by Invested Capital over the past 10 years (1999-2009), along with a decomposition that focuses on NOPLAT margin and invested capital turnover.

The one thing that stands out is how anemic GAP's NOPLAT margins are relative to the industry, especially in recent years, while GAP's invested capital turnover seems to be about in line with the industry. To state the obvious, this would seem to imply cost issues (so focus on supplier and labor relations in the affidavit makes perfect sense from this stand point). Even so, GAP's meager ROIC is not a new problem and has been poor for a long time, while the Pathmark acquisition didn't help matters and was probably a fools errand to acquire, unless the Pathmark segment is substantially better than the rest of the banners, in which case the inference here is that the rest of the banners are even worse than the consolidated results would suggest.

Note that turnover is an area where Village Super Markets excels with much higher IC turnover on a consistent basis relative to the above mentioned peers, which results in a much higher spread to the company's cost of capital over the past decade, even though Village's margins are the second weakest of the 5 comps. For me, this suggests that Village may have some pretty loyal customers who appreciate their low prices and keep coming back. So by looking at one name, I uncovered another potentially interesting opportunity to follow.

Anonymous,  12/15/2010  

Thanks Hunter for your usual high-quality analysis of a timely debt opportunity. You are truly a blessing to retail distressed debt investors.

I would like to see you post a follow up on this to discuss which subsidiaries are guaranteeing the unsecured debt.

First, is the unsecured debt recourse debt to the parent, or is it guaranteed exclusively by the subsidiary?

The prospectus for GAJ goes on for pages about the difference between restricted and unrestricted subsidiaries. Probably it would be desirable to understand that issue and understand which of the four unsecured bond series attaches to restricted and which attach to unrestricted.

Until those issues are addressed, it's difficult to see how any residual value in the parent after covering the DIP and secured debt might be applied to the unsecured bonds.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.