DirectBuy hires restructuring advisors; HIG and Bayside Capital lead bondholder mobilization

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DirectBuy in early December disclosed to investors that it retained Carl Marks Advisory and law firm Greenburg Traurig to assist with its balance sheet restructuring, Debtwire reports.

The Indiana-based retail buying club has 116 franchise stores and nine company-owned stores throughout the country. Its business model revolves around selling multi-year memberships for access to buying brand name home improvement goods directly from wholesalers. But its earnings have come under pressure as the housing market struggles to regain its footing.

In addition to the decline in earnings, the company faces a class action lawsuit relating to its sales practices. The litigation, which orignated from complaints out of California, Connecticut, Indiana, and New York, alleges that DirctBuy’s pricing practices are illegal since the company conceals kickbacks it receives from manufactures, which in turn inflates the cost of goods. The cases, on behalf of members from 2002 to 2010, were in October consolidated in an Indiana district court as Wilson et al v DirectBuy.

The company is also defendant in a case brought by West Virginian and Connecticut attorney generals who allege the company engages in unlawful and high-pressure sales practices.

Misdirection

Alarmed by DirectBuy’s retention of restructuring professionals and warning that a USD 10m bond interest payment due on 1 February might not be paid, a group of investors got together recently to kickstart organizational efforts. An ad-hoc group of noteholders led by private equity firm HIG Capital and HIG’s credit-based hedge fund affiliate Bayside Capital hosted an organizational call on Thursday (1 December), according to three sources familiar with the situation.

Together, HIG and Bayside own at least a one-third blocking position in DirectBuy’s USD 335m 12% second lien notes maturing in 2017, one of the sources said.

While some bondholders are skeptical that owning the business will prove lucrative given DirectBuy’s operational freefall and legal headaches, HIG and Bayside aim to build on their blocking position to advance their loan-to-own aspirations, two of the sources noted.

Operationally, the legal and membership decline pressures have limited DirectBuy’s resources, forcing the company to scale back its advertising campaign, which impacted its ability to attract new members. The wholesale club recorded 3,148 new memberships in October, a 46.7% collapse from 5,909 in the year earlier.

The eroding fundamentals eventually led the company to trip its loan covenants when it fully drew down its USD 30m JPMorgan-led revolver during the fourth quarter ending 31 July, 2011. The company ended the fourth quarter levered roughly a turn above its 4.9x total covenant cap, booking USD 8.4m of EBITDA, a 62% drop from the USD 22m it generated in the prior year period. The colossal earnings swoon puts FY11 EBITDA at USD 61.4m, down from the USD 89m in FY10. JP Morgan, however, chose not to declare the debt due and payable immediately, several sources noted.

“Given the financial performance and that fact we will likely not get interest, we want the keys to the company,” said a bondholder.

The 12%s second liens are quoted at 20/21 today, up from 16 on 29 December, said a trader.

Calls to the company, Carl Marks and Greenberg were not returned. Messages left for officials at Bayside and HIG were also not returned.

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