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, and through the process that we are about to explain, MAG hopes to eliminate close to $300 million of debt off its books.
The primary method for MAG to clear its debt is 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 means they are getting stock in MAG, paying for this equity with the money that MAG owes them.
However, the amount of money that MAG owns 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.
Chapter 11 for Brands
Not all of MAGs debt will be converted into equity for the companys lenders, however. This is presumably because the amount of money owed exceeds how much money MAG is worth on paper.
Therefore, 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, Performance Machines (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.
Chapter 11 filings give fairly large ranges of debt declaration once you get beyond the million dollar range, and there are several of MAGs holdings filing in the $100 million to $500 million range.
However, taking the smallest amounts possible into account, the MAG companies are filing for a combined amount in excess of $872,650,000. This means that real figure is likely above the $1 billion mark.
By having these companies file for protection under Chapter 11, the new owners of MAG will be able to more rapidly turnaround the companys overall business, and return to profitability.
It is not clear at this time how much of this near-billion dollar debt is owed to MAGs new financial owners, though we imagine it is a considerable amount.
In the Transition
In order to finance these companies through their bankruptcy proceedings, MAG has secured $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 companys employees, customers, and vendors. For the most part, that seems to be true. Undoubtedly, MAGs new owners will change the companys business focus and operations, in order to ensure profitability post-bankruptcy.
On a more macro scale however, MAGs 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.