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Friday, 1 December 2017

Motorsport Aftermarket Group (MAG)

MAG’s capital and debt restructuring designed to allow it to “exploit growth opportunities”
By AMD Magazine Editor-in-Chief Robin Bradley

The news that the Motorsport Aftermarket Group (MAG) was eliminating approximately $300 million in debt through the Chapter 11 process (November 15, 2017) sent shockwaves around an already nervous industry. The Company’s release that announced the news was quite detailed and transparent, but that didn’t stop the rumor mill going into overdrive, with some online media outlets rushing to “false and dramatic conclusions rather than reporting the facts.” MAG is clear that it is “undergoing a balance sheet restructuring, not an operational one.” 

I followed up on my February 2017 interview with MAG CEO Andy Graves a week later to add some context to the story.
Back in February, when I interviewed him at the Tucker Rocky/Biker’s Choice Dealer and Brand Expo in Texas, I did so in the context of industry rumors about the Group’s viability at that time following a round of cost control measures in the late summer of 2016.
In February one of the first questions I put to him was whether or not the company was trading profitably. He assured me that the business was profitable at that time. So, after the initial industry noise about the recent filings had calmed down somewhat, that was again the first questions I put to him.
“Absolutely,” was Graves’ immediate response. “In fact, if we were not profitable, then we wouldn’t have been able to put together this kind of capital restructuring plan at all.
“When Lacy Diversified Industries (LDI) bought MAG and merged it with Tucker Rocky/Biker’s Choice in early 2014, the motorcycle parts and accessory market had two or three years of growth under its belt. At that stage the motorcycle industry was one of many specialty leisure based consumer markets to have seen some recovery, and the widespread expectation at that stage was that, even if modest, there would continue to be at least some form of growth in the years ahead.
“Based on those judgements, LDI financed the transaction with a fairly high leverage. It is only ever with the benefit of hindsight that such judgements can themselves be judged. As everybody now knows, the three years since then simply have not seen that growth sustain.

“The company could have continued to manage through to the 2020 and 2021 due dates on its long-term debt, but given what we have all been seeing in the market this year, the decision was taken to use this off-season to act now and restructure that debt in such a way that the company could continue to meet whatever market conditions lay ahead.
“This recapitalization of our balance sheet is designed to make sure that we are sufficiently well financed to ensure job security for out valued team members, and that the business can continue to pay its way and to exploit the undoubted growth opportunities that it has. We have a fantastic line-up of products, a very talented and dedicated team, and even in a down market, we will now be able to make the investments needed to help our brands, vendors and dealers prosper.
“The filing is based on a financial transaction that will reset our capital structure. It is one that will have very little effect on our day-to-day operations – certainly very little negative impact.
“There will be no layoffs arising from this, it is business as normal. The maximum possible level of vendor payables as permitted by the courts will be met, and that is something we are going to be petitioning the courts hard to allow us to maximize.
 “The structure of the deal is a a debt for equity swap. This means that certain of MAG’s lenders will be trading our existing debt, the roughly $300 million, for equity in the reorganized Company. In other words, these lenders will be the new owners of MAG upon emergence. In addition, this same group of lenders is providing additional financing as a show of support and belief in MAG. Without this debt, our balance sheet is stronger and MAG is poised for growth.
“This means that LDI, Leonard Green & Partners (LGP) and the other legacy stake holders will no longer be a part of the ownership equation. In taking the hit, LDI and LGP are taking responsibility for the judgements they both made at the time of the merger.
“It is precisely because of the profitability of our trading position and the positive cash-flow generation position of the business that the new owners have been enthusiastic to provide us with this solution.”
“Moving forward, the business has the necessary capital to transition through the process and will have a substantially improved capital reduced debt position once it emerges.”
Graves thinks that the somewhat less than $50m of long-term debt that the company will be left with is a “perfectly manageable sum for a business of this size” and says it will form part of the asset backed revolving line of credit that the business has access to for funding day-to-day operations.
“In fact, the available line of asset backed credit we will have access to will go up to $115m, so we are well equipped to fund operations and make strategic decisions.
“Post restructuring we’ll have gone from $400m of debt, $350m of which was term debt, to less than $100m of debt in total. That is certainly a very manageable debt structure for us and it removes the burden that restrained us.
“In the meantime, we have access to $125m of court approved Debtor In Possession (DIP) financing  to fund ongoing operations.”
Some of the wilder internet reports had suggested that MAG may have filed under the pressure of total indebtedness approaching $1 billion, but Graves is keen to assure the market that this is far from true and explains that a look at the petitions supports this fact.
“Unfortunately, a blogger took all of the petitions and added the liabilities numbers together which is where the incorrect figure came from. That approach, is not how one get to the total liabilities number. What folks don’t understand is that this is a very transparent process, everything is public and accessible to anyone who is interested. The danger however, is assumptions made by those who are not versed in this legal process making incorrect assumptions,” says Graves.
With regard to vendor payables, Graves says that all orders placed since the November 15th petition must be paid in full pursuant to the bankruptcy code. “That is the law, and that is what we are well funded to ensure.
“In an effort to ensure our vendors are not impaired, we are asking the Court for permission to pay any outstanding amounts owed vendors prior to the filing. Any goods received by us in the 20 days prior to the petition being filed will be paid in full. Older debts are then subject to bands and percentages based on age and what the bills were for. However, we will be certain to make every effort to ensure that the maximum possible amount is paid within the limits of the law, and we will be working the discretion that the courts have. We will make sure that the courts understand that our vendor partners are critical to the interests of all concerned on a moving forward basis.”
Turning to the future, Graves is positive about the outlook. “We think the work we have done to restructure and refine our business in the past 18 months has put us in good shape in strategic terms.
“We believe we are well structured and will now be well financed for the current market environment and for that environment in the coming years.”
In which connection, Graves agrees that reasons for cautious optimism appear to be emerging. “It is impossible to put a timescale on it at this stage, but even if we are faced with a season or two of an essentially flat market, there are signs that we should have seen the worst of the decline by now. Tucker Rocky has weathered the decline in the ‘metric’ market, where we have been essentially flat in a down market. For everyone though I think the decline in the V-twin sector has reflected quite directly and quite quickly into parts and accessory sales.
“However, we are seeing some signs of improvement in some parts of the country and some parts of the market. Oil industry regional employment appears to be picking up, and farm prices have improved, so with rural areas being so important for the powersports industry, it may be that the national employment statistics and still very good macro-economic indicators point to some improvement coming soon.
“I think that Harley’s new product program will start to see their numbers improve, and that Indian will continue to grow well. There are some signs that some of the newly emerging customer groups may be going to start to migrate towards mainstream custom platforms before long too.
“I think there are more positive trends emerging in the V-twin market than we’ve seen in the past couple of years. Certainly, from our point of view, I think our brands and their product lines are well positioned for whatever lies ahead. We have great product for traditional cruiser riders, and we also have the brands that can speak to the emerging generations of consumers, too. I think we are uniquely well placed in that respect.
“That is more reason why the timing of our capital restructuring makes sense. We want to be sure that we are able to respond to whatever demand emerges and capitalize on the strengths the business undoubtedly has.”
A feature length version of Robin Bradley’s interview with MAG CEO Andy Graves will appear in the next edition of AMD Magazine.