Description

Trick or Treat?  That is always the question. 

It is time for a normal Halloween!  It might even be a rebounding, makeup-for-past-losses Halloween?  If that happens, Party City could see normal EBITDA.  Normal EBITDA will keep the dream alive for the current owners of Party City.  And, of course, if the current owners are dreaming well then the current bondholders are getting paid...  if that happens then the bonds might be refinanced.  There were a lot of IFs in that sentence but I still recommend some Party City Junk trading at 48 cents on the dollar coming due in 2026.

Exhibit 1:  Halloween spending is projected to recover this year.  https://nrf.com/media-center/press-releases/halloween-participation-returns-pre-pandemic-levels-record-spending

Here’s what a normal Halloween might look like.  Halloween is a big deal for Party City.  They have less debt than they did in the past (but they pay more for it).   Pre-covid adjusted EBITDA averaged around $400 million. 

Exhibit 2:  Bloomberg FA screen for Party City. 

Based on just the August month Google Search data, it appears that consumers are more excited about Halloween than they have ever been.  This confirms the NRF data.

Exhibit 3:  https://trends.google.com/trends/explore?date=all&geo=US&q=halloween%20costume

Recessions don’t seem to hold consumers back from thinking about Halloween.  While Party City barely existed in 2008, consumers were searching up Halloween costumes more than ever during the great financial crisis.

Exhibit 4:  https://trends.google.com/trends/explore?date=all&geo=US&q=halloween%20costume

The bonds I recommend are the hold out bonds that did not participate in the exchange during covid crisis. There are only $92 million still outstanding from the original $500 million. They will be just one notch up from equity if Party City files for bankruptcy- very close to the bottom.  

Here’s what Party City has coming due:

$22.9 million in August of 2023 (unsecured, trading at 75 cents)

$161 million in July of 2025 (1st Lien, floating LIBOR + 5%, trading at 67 cents)

$750 million in Feb of 2026 (1st Lien, trading at 65 cents, 24% YTM)

$92.2 million due in Aug of 2026 (unsecured, trading at 49 cents, 30% YTM) <<- I recommend these

$129 million drawn on 1st Lien revolver with ~$200 million more available.

Downside:   If Party City does restructure, which is likely, it won’t be for a couple of years.  In that time you will collect several coupons ($.13) bringing your cost down to $.35.  You will come out of that bankruptcy with nuisance equity worth $.03.   Your downside is therefore 67%.   Your recovery could be less bad than that.  They will pay off the $22.9. million coming due in August of 2023.  Assuming they fully extend their credit line, they will enter bankruptcy with ~$1.4 billion ahead of us.  We will represent only 6% of the amount of debt outstanding at that time.  We will be given a voice in bankruptcy and the lawyers that represent our class can inflict millions of dollars in headaches.  Lawyers might be able to say the covid-era debt exchange was unfair (I know this because I am a dumb retail investor who wasn’t notified, wasn’t given the option to participate, etc. etc.).  The first lien debt was aggressive, predatory, didn’t perfect transfer of assets, didn’t do this, didn’t do that, etc. etc.  I think we could slip away with more than nuisance money. 

A famous, successful, good-looking & intelligent equity investor by the name of Clifford Sosin invested over $70 million in Party City equity over the last few years.  He has a $3.58/share cost basis (according to Bloomberg).   Surely someone as clever as he is will not let his equity investment turn to zero as the bondholders run off with the company?  Heck, his 11 million shares of At Home Group just got taken out by a PE firm for $36.99/share in July.  $396 million in cash might allow him to get a plan in front of the judge.  He runs a concentrated portfolio of growth companies which, despite the carnage in growth, exceed $600 million in value plus nearly $400 million in cash thanks to At Home.

Exhibit 4:  Source Bloomberg.   Not only is Clifford Sosin good-looking and generous to bondholders, he’s also got lots of money!

Summary:  This is risky.  I like the risk/reward of this situation and I am going to Party Hard this Halloween.  For the record, my cost basis on this is 8 cents and I’ve already collected a few coupons so I’m writing this as therapy.  I do feel that it is a reasonable risk/reward and I would buy it again at today's price.

Catalyst

Big Halloween.