(Bloomberg) -- B. Riley Financial Inc., the boutique investment bank that’s been whipsawed by a US probe into a former business partner, a string of losses and a plunging stock price, has a new headache: a struggling Texas home-furnishings chain it doesn’t even own.
Conn’s Inc. is teetering near bankruptcy, and B. Riley is potentially on the hook for about $148 million, around a third of its entire loan portfolio. Much of that stems from a loan B. Riley made in December to help Conn’s buy a troubled rival, W.S. Badcock.
The twist is that the seller was Franchise Group Inc., or FRG, an owner of retail chains where B. Riley is among the biggest shareholders. There’s potentially more at risk for the duo because instead of getting paid in cash, FRG took stock in Conn’s — and Conn’s shares have since lost most of their value.
Short sellers have been relentlessly betting against B. Riley for the past year over soured acquisitions and its dealings with FRG and founder Brian Kahn, whom US authorities have probed for his alleged role in the collapse of a hedge fund. Now they’ve latched onto the Conn’s deal, calling it a threat to the health of FRG and thus to B. Riley — an important investment bank and adviser for dozens of smaller public companies.
B. Riley, led by founder Bryant Riley, says critics are making a mountain out of a financial mole hill. The firm’s $108 million loan in December to Conn’s — which was whittled to $93 million in February — is expected to be fully repaid in any scenario, according to a spokesperson’s emailed statement.
The Conn’s stake is one of the smallest assets in Franchise Group’s portfolio, and B. Riley is an “active participant and fully engaged with Conn’s and other stakeholders,” the spokesperson said. “B. Riley is comfortable with its position and protections in place for this investment.”
Representatives for Conn’s and Kahn didn’t respond to requests for comment. Kahn has maintained he didn’t do anything wrong and hasn’t been charged by authorities. He left FRG in January but stayed on as a consultant for strategic matters, mergers and acquisitions.
Market prices reflect some concern among investors about all three companies.
Conn’s shares, which fetched about $3 before the Badcock deal, now hover around 65 cents, and Los Angeles-based B. Riley tumbled to a four-year low this month. Franchise Group’s senior debt is quoted at around 67 cents on the dollar with the yield topping 35%, a level that typically reflects fear of a default. Bloomberg has reported that FRG creditors have consulted legal advisers.
“B. Riley needs to come clean with investors as to what is really going on at the company, rather than covering up their dire financial situation,” said Marc Cohodes, a prominent short-seller who has made several bets against the firm.
Short sales against B. Riley amount to just over 60% of the stock’s float, data from S3 Partners show. That’s the biggest such bet of its kind among the almost 1,500 publicly traded US companies that have attracted short wagers worth at least $100 million, according to S3 director Matthew Unterman.
Creditors Balk
Conn’s morphed from a family-owned plumbing company in Beaumont, Texas, in the 19th century into a home-goods chain based in The Woodlands, Texas. It has hundreds of stores sprawled across southern states that give low-income customers loans so they can afford to buy its appliances, furniture, mattresses and electronics.
The business has faced dwindling sales and mounting bad debts and is now mulling bankruptcy, Bloomberg has reported. Its financial woes flared a month ago, when Conn’s said it couldn’t file its quarterly report with regulators, citing its pursuit of a new deal for its revolving credit facility. Without access to this, loans to customers would be curtailed and sales would suffer.
Short sellers such as Cohodes speak of a domino-like scenario in which a default at Conn’s could ripple through FRG and B. Riley.
As part of the Dec. 18 deal, FRG received preferred shares in Conn’s that are convertible into almost half of its common stock. But Conn’s market capitalization has plunged almost 80% to less than $20 million.
In turn, B. Riley owns just under a third of FRG. Any damage to the Conn’s stake might thus seep onto the investment firm’s own balance sheet — or so goes the theory.
But B. Riley is no stranger to debt workouts and bankruptcies. It has its own restructuring unit that specializes in troubled retailers, including well-known firms such as Toys ‘R’ Us and Bed, Bath & Beyond. In its statement, the firm dismissed the domino scenario, and says that the loan to Conn’s is “well-collateralized” and fully secured, ranking second in priority for repayment.
For its part, FRG has other assets to draw upon and has been seeking to sell some of them to raise cash. Bloomberg reported in May that the company was looking for ways to securitize Pet Supplies Plus, and Bryant Riley said in December that Vitamin Shoppe might be a sale candidate.
“We expected the implementation of this strategy to take time and we don’t believe the value of FRG’s stake in Conn’s will be the arbiter of its success,” B. Riley said in the statement, adding that it has a long history of hands-on investing in complex and distressed situations.
Then there’s the Stephens family, the business clan behind Little Rock, Arkansas-based Stephens Inc. They rank among Conn’s senior lenders and among the biggest common stockholders, giving them a strong incentive to keep the company afloat. A representative for Stephens declined to comment.
Furniture Bust
The crunch has its roots in November 2021, when FRG bought Badcock for about $580 million. FRG, then a publicly traded firm led by Kahn, owned two similar chains and envisioned benefits from the added scale, but sales slid at all three as consumers ran out of pandemic stimulus money.
FRG made back much of that sum by selling two batches of Badcock’s customer receivables totaling $733 million at a discount to B. Riley in December 2021 and late in 2022.
But by February 2023, B. Riley had doubts about Badcock’s business and said it wouldn’t buy any more receivables after the first quarter, leaving FRG facing a potential default, securities filings show.
The upshot was a management-led buyout in August last year for FRG. The bank also arranged a loan from lenders including Nomura Holdings Inc. to finance the deal.
Within months, FRG and B. Riley moved to sell the Badcock business to Conn’s. Even after that was done, B. Riley had $58 million of receivables tied to Badcock customers as of March 31, B. Riley said in a regulatory filing. An economic downturn could put pressure on them and affect the loans’ collectability, according to B. Riley.
Shares of B. Riley fell more than 7% in Monday’s trading.
--With assistance from David Voreacos and Reshmi Basu.
(Updates with share price and receivables description at end of the story. A previous version corrected B. Riley’s stake in Franchise Group.)
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