Just before the US Fourth of July holiday, the parent company of American DVD kiosk chain Redbox had run out of cash — and its biggest lender out of patience.
Redbox’s owner, the publishing, programming and pet food group Chicken Soup for the Soul, had filed for Chapter 11 bankruptcy hoping a judge could oversee a balance sheet restructuring, allowing it to cut some of its nearly $1bn of debt in a bid to salvage its business.
Instead, a war of words between Chicken Soup and its lender, the private capital group HPS Investment Partners, erupted: a breach so severe that the Delaware bankruptcy judge has ordered the company to liquidate immediately.
The ugliness has shocked even distressed debt veterans. But the Chicken Soup fight may be a preview of the future of corporate restructurings, where a single private credit lender can more forcefully exert power over a borrower than has previously been possible with more widely held bank loans.
“It’s unavoidable that there’s going to be some number of these private credit deals that need to restructure,” said Andrew Milgram, chief investment officer of Marblegate Asset Management, a distressed debt investor that was not involved in the bankruptcy.
“No matter how good a document or how good a lender you are, companies make mistakes . . . but you live with the consequences.”
Chicken Soup’s unravelling is a rare blight on the investment record of HPS, a giant in the private credit industry which manages $146bn of assets and is positioning itself for a potential public listing or tie-up with a rival private investor.
Redbox’s travails can be traced back to 2016 when Apollo Global Management acquired its then parent company for $1.6bn.
DVD rentals were fading in a world dominated by Netflix and other streaming companies. But price-conscious Americans enjoyed the convenience of Redbox kiosks, which they found in grocery stores and petrol stations. The company had a successful loyalty-card programme and boasted about 40mn customers.
Despite Redbox being battered by pandemic lockdowns which curtailed Hollywood filming as well as in-person grocery shopping, Apollo took it public at a near $700mn enterprise value in 2021.
By then, HPS was the primary lender to Redbox, holding a more than $300mn term loan. Only a year later, Redbox was stalking a bankruptcy filing until a white knight emerged: Chicken Soup for the Soul, which had itself gone public in 2017 through a crowdsourced IPO supported by the likes of actor Ashton Kutcher.
Chicken Soup for the Soul originated from a best-selling self-help book in the 1990s that evolved into a publishing company. Veteran media entrepreneur William Rouhana acquired the company in 2008 and jumped into video production, with Chicken Soup eventually acquiring Crackle, a video-on-demand start-up from Sony.
Chicken Soup and Redbox combined in 2022 in an all-stock deal valuing the latter at less than $400mn, with most of that figure attributed to the loan held by HPS. The investment firm pumped more cash into the new company, which was forecast to generate more than $500mn in annual revenue. Apollo quickly exited its stake after closing.
For its part, HPS believed it had little choice but to support the tie-up. Redbox had not yet recovered from the pandemic and it was unclear what value the business would fetch in a bankruptcy, given markets had seized up as the Federal Reserve aggressively raised interest rates.
“We tried to support them,” said one person involved in the deal. “We tried to be accommodative, give [Redbox] time to work it out and then we lost faith.”
It was in the months after the Redbox-Chicken Soup deal closed, however, that the relationship between HPS and Chicken Soup started to sour.
Rouhana became convinced that HPS was looking to turn the screws on Chicken Soup rather than executing the growth plan that the company had promised public shareholders at the time of the merger.
The chief executive believed HPS repeatedly cut off options for it to raise rescue financing as results deteriorated, with an eye on seizing the thousands of titles in Chicken Soup’s film library, which included classics such as The Little Rascals. The library was thought to be worth as much as $180mn, according to a person familiar with the valuation.
HPS, however, was becoming concerned about Rouhana and began pressing for a conversation with senior leaders to address Chicken Soup’s flailing financial performance. Information HPS needed to judge how the business was performing was being withheld, the firm believed.
Troubles exploded into view a year ago. Without a new loan, Chicken Soup could not secure films when they started returning to the box office following the 2023 Hollywood strike, putting the business in a death spiral. Meanwhile, it continued to pay dividends to preferred stockholders — further aggravating creditors.
HPS ultimately objected to a $40mn loan Rouhana tried to secure last November, claiming it had been given just eight days to sign off on the deal and had been given “no information”.
The business by then was in a tailspin: losses in 2023 rose nearly six-fold from the year before to $637mn, when asset impairments were included. HPS told Chicken Soup it should prepare for bankruptcy that November. Instead, Rouhana kept hunting for capital.
HPS relented and said it would take a 60 per cent haircut on its position if Rouhana could come up with $200mn to pay off the HPS debt. But none of his proposed financings ever closed.
“There was a pattern of promises that were broken,” HPS’s lawyer said in court.
However, a person close to Chicken Soup said that “every time it sought HPS’s co-operation, they turned out to be a black hole where lending agreements and proposals repeatedly went to die”. When it filed for bankruptcy in June, it owed HPS more than $500mn, including interest.
Even by the standards of insolvency, Chicken Soup filed for bankruptcy in a chaotic state. On the day of the bankruptcy filing, the company’s lawyer said it was down to $25,000 in its bank account.
More than 1,000 employees had not been paid for weeks. When it abruptly liquidated, all of its workers were fired and left scrambling to get the documents needed to prove they had lost their jobs. Without proper paperwork, they were unable to apply for unemployment benefits or Medicaid.
“We feel as though we are being treated like cattle in a stockyard, awaiting slaughter, left without any recourse,” Kim Sweeney, who worked as an operations administrative assistant for Redbox for more than a decade, told the court in July.
“I have seen a lot of serious mismanagement,” Richard Pachulski, an attorney who represented Chicken Soup after its first bankruptcy counsel resigned, said during a hearing on July 10. Pachulski said in the hearing that the company’s management was “a train wreck like nothing I have seen” and that “what has been done here is criminal to be very frank”.
Rouhana told the Financial Times that HPS had thwarted his rescue financing plan and was responsible for the decision to wind down as a result. Lawyers for Rouhana denied wrongdoing or mismanagement.
“I had not contemplated liquidation,” Rouhana said. “Rather, I had secured the funding necessary to keep paying our employees and maintaining their benefits. Sadly, our senior lender [HPS] stood in the way.”
Forcing the company into liquidation was considered the best way for HPS to maximise its recovery, a person familiar with the matter said. The firm hopes ultimately to recoup between 50-70 per cent of its investment, a figure that includes the interest payments and fees it has already collected on the loan.
Chicken Soup’s failure will nonetheless stain HPS’s record — even if its losses could have been far worse.
The firm is seen as a shrewd creditor, willing to take on complex risks that some of its rivals avoid.
It amassed a $21bn fund in June to underwrite relatively risky loans — often to companies on the cusp of a restructuring or difficult refinancing. The previous fund vintage returned 14 per cent after fees this year, through to the end of June, according to a person familiar with the performance.
HPS has still not reached a deal with the court-appointed trustee responsible for overseeing Chicken Soup’s winding down.
“It is a bad investment for us,” one person briefed on the firm’s thinking said. “Once every 10 years we have one of these.”
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