Industry News

A Tale of Two Bankruptcies

Not all bankruptcies are alike. The two forms generally seen in business are Chapter 7 and Chapter 11; the “chapter” part refers to the section of the Federal Bankruptcy Code in which each type is defined.

Chapter 7 is, plain and simple, liquidation. The assets of the company are sold off in order to pay off creditors, whose status is prioritized by the nature of the debt—secured, or unsecured. Chapter 7 is, metaphorically if not numerically, the last chapter. Stick a fork in the company; it’s done.

Chapter 11 is reorganization, also sometimes poetically referred to as rehabilitation. In a Chapter 11 bankruptcy, proposals are made for restructuring the debt, again prioritized by whether the debt is secured or unsecured. Creditors are free to voice concerns and objections, and in the case of a company with sizable debt and a substantial number of creditors, things can get very ugly indeed. In the worst case, where no plan can be agreed upon by creditors and the court, Chapter 7 is the next step.

Industry News has looked at the tumbling Jenga that was Gibson Brands several times, most recently, here.  As we’ve seen in numerous other cases, the company was burdened with enormous debt allied to profligate an ill-advised acquisition and diversification. The heart of the company, Gibson Guitar, had occasional missteps, but was still a strong and valuable brand.

Gibson Brands filed Chapter 11 in May of this year, and emerged from that bankruptcy at the end of October— pretty quickly as such things go. For a while, a fight between major creditors made it seem as though there would be no resolution, but ultimately, a plan proposed by KKR was accepted by the Court. Longtime CEO Henry Juszkiewicz was jettisoned, and his stake in the company voided. The new company will be structured soon with a new CEO; Nat Zilkha, a former rock guitarist and head of Alternative Credit at KKR will be on the board of the new company.

As bankruptcies go, this is a happy ending.

Chapter 7 filings are seldom happy endings; rarely does any creditor receive enough of what they’re owed to make them happy. In the case of Thiel Audio, it’s just the last stop in a long string of indignities for a once-storied audiophile speaker brand. Back in Copper #51, Industry News looked at the shutdown of Thiel and pontificated, “…gone. All gone.”

That was premature: now, with the filing of Chapter 7, it could be said that Thiel is going, going…

The actual bankruptcy filing can be read here, and is alternately horrifying and fascinating. Assets are listed as about a half mil in furnishings and artwork, along with several hundred thousand in inventory. Both numbers seem, to be charitable, hard to believe. The biggest creditor is Chinese speaker OEM Meiloon, owed $1.6 million; industry insiders who have worked with Meiloon have expressed astonishment at that number, given the company’s normally-tight terms.

It will be interesting to see how this plays out. One hopes the Thiel name won’t be added to the likes of Acoustic Research, Advent, and other once-great brands, as a brand name misapplied to cheap accessories sold at Best Buy or Amazon.