Chapter 11 Bankruptcy for MAG group

[pegasus1300]

I lifted this in it's entirety from TrikeTalk.com. It was posted by the creator Bazooka. Somewhat long but interesting as an indicator of what maybe to expect in our industry in the future.


Coppell, Texas-

Industry Giant, the Motorcycle Aftermarket Group (MAG) is not a name that motorcycle enthusiasts are usually familiar with, but the family of brands that the company owns certainly is: Kuryakyn, J&P Cycles, Vance & Hines, Tucker Rocky, Biker's Choice, Progressive Suspension, Burly, Motorcycle Superstore, Performance Machine, Roland Sands Design, Renthal handlebars, Mustang Seats, Motorcycle USA, etc.

The network of brands has been struggling over the recent years though, and today we learn that many of them will be filing for Chapter 11 bankruptcy, while the overarching MAG Group business restructures its debt and finds new ownership.

While this is not the sexiest news story to happen in the motorcycle industry this year, it is certainly one of the most important and complicated. As such, we will try to break it down in a digestible way for you.

Debt and the New Owners of MAG

The first thing to understand is that MAG itself as company has acquired a massive amount of debt, approximately $440 million, and through the process that we are about to explain, MAG hopes to eliminate close to $300 million of debt off its books.

Editor’s note: while it is known colloquially as MAG or the MAG Group, Velocity Holding Company is in fact the parent company for this house of brands and the Tucker Rocky distribution business.

MAG is eliminating $300 million of its debt burden by what is called a debt-for-equity swap. This basically means that the lenders that MAG owes money to will take an equity position in MAG. This also means that they are getting stock in MAG, and are paying for this equity with the money that MAG owes them.

However, the amount of money that MAG owes is substantial, and it means that so much equity in MAG must be exchanged in order to pay off the loans that these lenders are effectively becoming the new business owners of MAG.

As such, these new owners are Monomoy Capital Partners, BlueMountain Capital, and Contrarian Partners, and they will lead the new owners group for MAG and its house of brands – implementing their own new Board of Directors for MAG, which will surely appoint new leadership to MAG and its holdings.

By eliminating $300 million in debt through this equity swap, MAG will be able to rapidly “de-lever” its balance sheet, “leverage” being an industry term to describe how much debt a company is using to fund its operations. The more leveraged a company is, the higher its debt-to-equity ratio.

Chapter 11 for Brands

To restructure the debt, many of MAGs holdings are filing for relief under Chapter 11, Title 11 of the US Code – better known as Chapter 11 bankruptcy.

The companies filing for Chapter 11 are the following: Renthal Americas, Tucker Rocky, Biker's Choice, Performance Machine (which includes Roland Sands Design), Vance & Hines, J&P Cycles, Velocity Holdings Company, Velocity Pooling Vehicle, DFR Acquisition, Ed Tucker Distributor, Kuryakyn, MAG Creative Group, MAGNET Force, Motorcycle Superstore, Motorcycle USA, Motorcycle Aftermarket Group, Mustang Motorcycle Products, Ralco Holdings, and Rally Holdings.

By having these companies file for protection under Chapter 11, the new owners of MAG will be able to more rapidly turnaround the company’s overall business, and return to profitability.

It should be noted that of these brands were co-borrowers and/or guarantors to MAG’s overall debt, with the sole exception of Tucker-Rocky Georgia, LLC, which helps explain why both the parent company (MAG/Velocity) and its child companies (Renthal, Tucker Rocky, etc) are going through a Chapter 11 debt restructuring.

How This Debt Came To Be

MAG’s debt obligations total roughly $440 million, and come from a variety of sources: $65.5 million is from an asset-back loan; $290 million is from what’s called a first-lien term loan; while $85 million is from a second-lien term loan. All of these loans were entered into on May 14, 2014.

Since that time, MAG’s business has contracted by 20% – a decline of sales to the tune of almost $175 million. As a result of this sales decline, MAG’s earnings (EBITDA) have dropped from $46 million in 2014, to an estimated $20 million for 2017.

By eliminating a substantial portion of the company’s debt, MAG can expect to see a significant increase in its yearly earnings – an increase of over $10 million by our estimations.

In the Transition

In order to finance these companies through their bankruptcy proceedings, MAG has negotiated $135 million in what is called debtor-in-possession (DIP) financing.

DIP financing is money lent to a company pre-bankruptcy, and is typically used to continue normal business operations while the bankruptcy works its way through the legal system.

It should be noted that usually DIP loans like this are given with very strict provisions on how the money can be used. It is important to note too that DIP financing is debt that is senior to any other debt, that is to say, it must be paid back first during any refinancing or bankruptcy arrangement.

Coming Out the Other Side

MAG insists that it will be business as usual for the company’s employees, customers, and vendors. For the most part, that seems to be true. Undoubtedly, MAG’s new owners will change the company’s business focus and operations, in order to ensure profitability post-bankruptcy.

On a more macro scale however, MAG’s financial difficulties should be seen as a bellwether on the state of the American motorcycle industry. With only a handful of weeks left in the calendar year, we can surely expect to hear Q4 and annual reports that show motorcycle sales in decline.

Asphalt & Rubber is predicting an industry contraction of roughly 7% for 2017 in the USA, which is noticeable after the relatively flat past years of 2015 and 2016.

With sales down, companies struggling, and the motorcycle media landscape completely up for grabs (two titles of which were under MAG ownership), the curse “may you live in interesting times” certainly seems to apply.

Obviously this is an evolving situation in the US motorcycle industry. We will file additional reports as more information becomes available.

Creditors

The company and its affiliates filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Involved are Velocity Holding Co., Velocity Pooling Vehicle LLC, DFR Acquisition Corp., Ed Tucker Distributor Inc., J&P Cycles LLC, Kuryakyn Holdings LLC, MAG Creative Group LLC, Magnet Force LLC, Motorcycle Superstore Inc., Motorcycle USA LLC, Motorsport Aftermarket Group Inc., Mustang Motorcycle Products LLC, Performance Machine LLC, Ralco Holdings Inc., Rally Holdings LLC, Renthal America Inc., Tucker Rocky Corp., Tucker-Rocky Georgia LLC, and V&H Performance LLC.

The filing lists more than 14,000 creditors, including Dealers, manufacturers, service providers and individuals. The largest creditors listed are Sumitomo ($3.48 million), Pirelli Tire ($2.3 million), Arai ($1.55 million), Anthem Blue Cross ($1.4 million), Bridgestone/Firestone ($1.28 million), American Kenda ($1.1 million), Avon Tyres ($1.03 million), Cobra Engineering ($984,220), Cardo Systems ($684,097), Yuasa-Exide ($567,843), KFI/Kappers ($547,605), Ogio ($546,359), Guangdong Dynavolt ($523,739), Power Sport Industries/All Balls Racing ($440,904), Camso Inc. ($431,093), Cheng Shin Rubber USA ($425,781), Warn Industries ($423,629), Continental Tire ($404,385), FMF Racing ($376,239), EBC Brakes ($356,933), First Insurance Funding Corp. ($351,654), Bluegrade Logistics ($336,948), Yoshimura R&D of America ($301,142), Shorai ($293,937), Inoue Rubber Co. Ltd. ($291,515), Vialink/Seizmik ($266,447), Google ($250,000), Vista Outdoor ($245,498), Maxima Products ($237,213) and United Parcel Service ($225,000).

source: asphaltandrubber.com

[Bob Denman]

Wow...
Thanks for the news: I several of my "Go-To" vendors in there...
Let's all hope that they can find a way out!

[ARtraveler]

That explains what is going on with Motorcycle Superstore. Good information to know.

[Bob Denman]

I've noticed that the volume of email from them; has increased exponentially...

[ARtraveler]

I've noticed that the volume of email from them; has increased exponentially...

A buyers market for sure. Unfortunately, I already have at least two of everything that I need when it comes to gear. I am accessorized to the hilt on all three. So, I gotta pass on the deals.

[JayBros]

Smells like there will be some consolidation amongst the smaller companies to weather the contraction. Degree of consolidation will be a function of the aggressiveness of new owners and board(s).

[Deanna777]

Wow!
Thanks for letting us know, I recognize some of the names.
Deanna

[Chupaca]

Worked with many of them during my time in the motorcycle business.. do hope they can turn it around and save some of them

[SpyderAnn01]

I read about this last week in a Facebook post by one of their competitors warning customers not to place orders with J & P for fear they would lose their money. I hope they make it out of bankruptcy, it would be sad to lose all those businesses.