November|December 2011

A Look Back at 2011 – So Far, What’s So

The year 2011 began on a hopeful note with signals that the U.S. economy was showing signs of strength in 2010. This, after a dismal and disappointing 2009. In the following article, Great America’s Michael Petruski returns to review the first three quarters of 2011 with a look at industries and markets where asset-based loans are directly affect by change and cyclicality.

To begin with, automotive sales in the United States of light vehicles in 2010 were up 9.9% over 2009, with 11.6 million light vehicles sold compared to 10.4 million in 2009. In the energy sector, the U.S. rig count showed that on January 7, 2011, there were 1,700 rigs actively exploring for or developing oil or natural gas — an increase of 480 rigs over the previous year.

Commodity metals, including copper, aluminum, zinc and nickel, and shredded ferrous scrap and hot-rolled steel had all seen double-digit price increases in the time frame between November 2010 and February 2011.

Strong sales were also recorded in the first half of 2011, with auction sales of late model CNC machine tools, construction and mining equipment, agricultural equipment and over-the-road Class 8 tractors all showing an increase in value over 2010 levels. Additionally, 2011 analyst forecasts for new equipment orders for Class 8 tractors, trailers and railcars were up substantially over 2010.

Conversely, in December 2010, major retail chain stores posted a 3.1% increase in year-over-year sale results, which were slightly below the 3.4% increase forecasted by retail analysts, with analysts accurately predicting shopper fatigue in January and February of 2011.

In 2011, the rapidly changing landscape of online commerce and how consumers access and purchase music, movies and books pushed retailers Blockbuster and Borders Group into Chapter 11 bankruptcy. The lingering, weak residential housing market forced motion furniture manufacturer Berkline/Benchcraft into bankruptcy and high-end furniture retailer Robb & Stuckey to also seek Chapter 11 bankruptcy protection.

Metals — A Hot Start Followed By a Cool Down

The 2011 lending activity in metals has been selectively active in the importation and production of pipe and tube for oil and gas, pipe and tube for construction equipment and steel plate for wind turbines and new railcar construction.

As depicted below, the key commodity metals of copper and aluminum continued their upward price movement in early 2011 where copper peaked at $4.45 per lb. in February and aluminum peaked at $1.27 per lb. in April. Since both metals are actively traded on the London Metal Exchange (LME) and are affected by worldwide demand and supply, market prices softened in the second and third quarters. The primary applications for copper continue to be power generation and transmission, electronic product manufacturing and building construction. Primary applications for alloys of aluminum include automotive, aircraft and packaging. (See Figures for aluminum and copper.)

Similarly, shredded ferrous scrap, the basic raw material feedstock used by the mini-mills and integrated steel producers, moved sharply upwards with a peak of $475 per gross ton (GT) delivered in January. Prices have since leveled off to a narrow band between $460 per GT and $450 per GT largely due to domestic demand and a strong export market. The value-added hot and cold rolled steel prices experienced a run-up in prices during the first four months of 2011, followed by a steady decline in mill prices through August due to softer demand and higher inventory levels that were built up during the market price run-up. (See Figures for shredded scrap and hot & cold rolled.)

The Changing Landscape of Online Commerce

Since 2006, Blockbuster has been a victim to a changing environment in the movie rental industry that has seen a mass of people leave brick-and-mortar retailers in favor of online services like Netflix. Blockbuster began its attempted Chapter 11 reorganization in September 2010 with 5,600 stores, including 3,300 in the U.S. and the remainder abroad. The U.S. petition listed assets of $1.017 billion against a debt of $1.465 billion.

On January 20, 2011, in regard to the Chapter 11 reorganization of Blockbuster, U.S. Bankruptcy Court Judge Burton Lifland said, “It’s hard to say that this debtor is anything but insolvent.” On April 26, 2011, Blockbuster received final court approval to sell the remaining assets to Dish Network for $320 million. On July 2, 2011, Blockbuster announced that it had reached agreements with property owners across the U.S. to maintain operations at 1,500 stores — down from 4,255 in 2006.

On February 12, 2011, Borders, the second largest book retailer, filed for Chapter 11 bankruptcy protection. Borders had not developed an eBook reader similar to those made popular by online retailer Amazon’s Kindle reader, and Barnes and Noble eBook reader, The Nook.

Failing to get a viable bidder to buy the company and assume balance sheet liabilities, Borders agreed to hand its business over to a group of liquidation firms, including Great American Group, by mid-July of this year. On September 17, 2011, the last of the remaining 399 stores closed. To put this into perspective, six years ago the company had over 1,200 stores and employed more than 10,000 employees.

The Rising Cash Value of Intellectual Property (IP)

By early 2011, the lingering economic recession hit Rock & Republic, the edgy Hollywood premium denim jeans label sold in Neiman Marcus and Nordstrom. During its heyday, it was fetching prices of more than $200 per pair of jeans.

High-fashion vulnerability, coupled with the ill-fated business decisions of CEO and founder Michael Ball, forced Rock & Republic Enterprises to file for bankruptcy in April 2010. Though the company had just $97 million in 2009 revenues, by April 2011, VF Corp. agreed to pay $57 million in cash for the rights to the name. VF plans to sell the jeans in Kohl’s for between $39 and $49 per pair. Great American Group conducted a public auction of denim fabric, finished denim jeans, textile equipment and rare and luxury automobiles, which included a 1965 Shelby Mustang GT-350SR (with only 886 miles on the odometer) that sold for $125,000 plus a 15% buyer’s premium.

Unable to find suitable ABL refinancing, motion furniture manufacturer Berkline/Benchcraft liquidated under a Chapter 7 filing in May 2011. In August, Ashley Furniture was the winning bidder of the intellectual property with a $6.07 million bid, and made plans to produce new product in time for the October High Point Furniture Show.

On September 27, 2011, U.S. Bankruptcy Judge Martin Glenn approved the sale of Borders Group’s intellectual property, including customer lists and trademarks, for a total of $15.8 million. Barnes & Noble purchased the majority of the IP for $13.9 million.

Great American Group continues to monitor key market trends and indicators that directly affect the asset-based lending community.

Our firm’s review of 2011 saw volatility in both ferrous and non-ferrous metals with softening demand in the second and third quarters due to economic uncertainties in the U.S. and Western Europe.

Online commerce and the shift in how consumers access music, books and movies, drove retailers including Blockbuster and Borders into Chapter 11, and eventually into Chapter 7 bankruptcies.

Finally, strategic buyers found significant value, in bankruptcy, of intellectual property in tradenames, trademarks and customer lists.

Michael A. Petruski is executive vice president, general manager of Great American Group GA Advisory Services. Prior to joining Great American, he spent 14 years with Wachovia Capital Finance in Charlotte, NC, where he served as director of the Collateral Evaluation Group. Preceding his tenure with Wachovia, Petruski spent nine years as vice president – Collateral Evaluation with Citigroup’s Structured Finance and Leveraged Finance units in New York. Before entering the finance industry, he served as director of Machinery Sales and manager of Metals Procurement for American Can Company. He has a B.A. from West Virginia University and an M.S.A. from Western Connecticut State University.

For more than 35 years, Great American Group has partnered with businesses across the globe in effectively appraising and divesting assets with one main objective: to maximize value. Great American Group operates in two segments: auction and liquidation services, and valuation and appraisal services. These services are provided to lenders, capital providers, private equity investors and professional service firms as well as a wide range of retail, wholesale and industrial companies throughout the United States, Europe and Canada.