EP 16 | Tricolor Collapse, QVC’s TikTok Gamble & Kawhi Fallout

[Music] Welcome back to the Octas Download, the podcast for Credit Meets Culture and where you're used card dealer, your late night shopping channel, and your Netflix queue can all end up in restructuring at the same time. I'm Jason St. Johnna, and I'm Kevin Eckhart! If you're paying 25% for 106 months on a 2009 Nissan Cube, you have a favorite QVC host or the Algo thinks unknown number is your comfort watch. You're in exactly the right place. Hey Jason, before we move on, a lot of people asked me about our jingle. That's it probably playing in the background. I'll count on you for that. People asked me which, because this is 2025, which AI generated it. I had to be honest with them Jason. I said that's not AI. It's actually Johnny Cash outtakes from the American recordings. I had to hand stitched. I had to rip Ruben's house to steal that jingle. I heard a rumor about it from a recording engineer. We got it. I thought it was your neighbor Pete Seeger, but I guess we went with different things. Yeah, yeah, yeah, yeah, anyway. You know folks, I just got to say off the bat that Kevin is a little salty today, because his beloved dolphins did just good enough against the bills to keep like McDonald's job in place. I did not watch a single second of it. While we're telling stories, Miami Dolphin story, Steve Eckhart, my father passed away very sad. In July of 2024, we're in the ICU and he gestures over to me. This is near the end for everybody just so they know. This is very, this is like a few days. And he comes up, he's like gesturing to me. And I go there and say, you know, hey dad, you know how you feeling? And the last, this is the exact last. I was wondering if you were going to talk to him. The last coherent thing he said after this, it was all the nurses are trying to steal my organs and sell them to China. But he says, Kevin, we're stuck with two, aren't we? That was his last sensible thing. And I said, yeah, dad, I couldn't lie to a dying man tell him that maybe there was hope. I said, no, we're stuck with him, man. You know, the story has gotten a smidge and balanced since the last time I heard it, but it's still a good one. I mean, that's how stories work. They get a smidge and balanced. On today's show, we're starting with Tri Color Auto Group, a used car giant that collapsed seemingly overnight, shutting down 65 dealerships across Texas, Arizona and California. Then we'll turn to QVC, which has heavy TikTok spending, terrophetics, prepaid executive bonuses, and a very complicated deferred tax liability. Plus it's QVC and it's 2025. Yeah, it's a tough, tough look for those guys. Also, we have a Kauai update and a culture closeout on Netflix, unknown number. Quick disclaimer, Jason does not know how to pronounce Turicolor in Spanish. This is outrageous. These are our personal views. Not those of octas, our co-workers of the bankruptcy judge that just inherited 65 repot Kia souls. Listener discretion advised. The life of a repo man is always intense. This podcast is for information entertainment only. It is not investment advice unless you're investing in prepaid executive bonus clawback claims or deferred tax liabilities. In which case may God have mercy on that black hole where your heart should be you beautiful bastard. You know, the lawyers wrote that whole thing, right? They're getting more colorfully. I know. It's great. I really applaud them. All right, let's start where the wheels literally came off. Tray color or auto group. Okay, so Kevin and I are having a little bit of a pronunciation. We had this with Hoi and now we're doing it with Tray color. I think it is Tray color auto group just to be clear. But they named it, we'll get into this because their main consumer base is Hispanic Americans in the Southwest. And the Tray color is the nickname for the Mexican flag and many other flags. What I've been trying to tell Kevin all morning is that when you say that in Spanish, it's Tray color. Not that's not true. That is exactly it. That is exactly it. By the way, mother f*ck, this dude's from Pittsburgh. This is a YINZER. Okay. I was on Google listening to the pronunciation. So I'm pretty confident here. I mean, before we go on one more thing. One more aside, because we're in an aside kind of a Mexican flag, best flag in the world. It's got an eagle with a f*cking snake on it. Yeah. Bad ass. The only thing better would be a human sacrifice in the middle. Awesome. All right. Well, let's get into it. What pronunciation is a side? Tray color auto group has collapsed. The Dallas-based use car chain and subprime lender filed for chapter 7 on September 10th in the Northern District of Texas. Listing between $1 in $10 billion in assets and liabilities. Overnight, 65 dealerships across six states went dark. And, you know, this is a major. I hadn't known about this because I hadn't lived in the Southwest. But this is a major used auto car company, one of the 10 biggest in the country. Is Texas the Southwest? Well, I think they. I'm allowing. Anyways, for years, Tray color pitched itself as a bridge to mobility for families with limited credit history. They called this the credit invisible community, especially in Hispanic populations. These are folks who might not have a social security number, but have a tax ID number. And what Tray color was doing was allowing them to get subprime auto loans at the dealership where they were buying the car with that. It's the American dream. It is. Buy here, pay here, pay 25%. If the interest rates weren't so high, it might be the American dream. But I think before we get into the company itself, we should probably do a quick rundown on how the loan origination business works. And this applies to mortgages and auto loans extremely high level. But the basics are that giant banks, in this case, JP Morgan Chase, 5th third bank, Corp and Barclays, provide what are called warehouse loans to the originator. The originator here is Tray color. That's the company going out and finding people to lend money to. And so the big banks will set up this facility, and that allows them to send money as soon as Tray color originates alone. The warehouse facility is sort of temporary in nature like a revolver almost. The money's only lent as long as Tray color is formally holding the loan, which ideally is not supposed to be very long. Because the whole purpose of doing this business is to sell the loan onto a securitization vehicle and issue asset back securities with that sub loans. Now, here's what's funny for those of you who are old enough to remember the challenger exploding. If you're hearing the words Barclays and subprime, you might be having flashbacks to the great financial crisis. And it's not off because. I mean, that was 20 years. The challenger was 20 years before the great financial crisis. I know, but only the people who were born, who remember the challenger, remember the great financial crisis now. Interesting. But anyways, this is like a drunk side show of what happened back then. Because this is subprime auto loans, which is like a very, very obscure but important, I guess, part of the market. I don't think there's as much contagion knock-on effects as they're possible, but what happened with Tray color? I don't think people have derivatives on this stuff. I mean, I would be shocked if they didn't, to be honest with you. But what happened with Tray color is that the entire flywheel that I just described about money flowing around to set up these subprime auto loans and then securitize them, came crashing to a halt when allegations arose that Tray color was double pledging collateral. That is a big no-no in this world. That's not good for the civilians out there. Because all of these facilities rely on a sort of clear chain of where the collateral is at any time. And it's supposed to end when the warehouse facility lean ends the securitization of the. This is all giving me terrible flashbacks, man. Yeah, exactly. Colonial bank brothers out there, we remember. Point being, Kevin, we don't really know what the double pledging is exactly, but as soon as the allegations arose, the whole thing collapsed and they crashed in the chapter seven. They got to keep generating new receivables for the warehouse facility in order to continue functioning. Yeah. And so when the warehouse facility stops, they can't fund new loans, they can't sell cars. But so Bayzie, you have an enormous presence in the used car world that overnight seemingly went from bustling and selling cars and originating loans. To crickets and tumbleweeds across the showroom. Well, I mean, it's the Southwest, so there's going to be tumbleweeds in the field. Always tumbleweeds. Always with the tumbleweeds. The timing is pretty ominous. August auto sales were actually pretty strong. New cars were up 2%. Used cars were up 9% year-over-year despite massive price increases and high interest rates for anybody looking at cars lately. This was not macro. This was a unique model that looked great until the headlights, car play and exhausts started disintegrating. I should know, I owned a Stellantis made alpha rameo. Then the shambling wreck, more interestingly, was totalled in a head-on collision with Trump's immigration policies. Like Jason mentioned, this is a dealer chain that relied on people who didn't necessarily have a credit history and who didn't have social security numbers. You can imagine those are people who are now either unemployed or have been sent to Guantanamo, thanks to the current administration or the Sudan or wherever. Even if the actual customers were not subject to this, people are naturally less willing to go out there and do things like apply for loans at a place that is known to provide loans to undocumented immigrants because obviously unmasked ICE thugs could just sit outside like they're doing with Home Depot. It's a little more than just a double collateral kind of mess. It's also a bit of a policy issue and whoever was running it has become a victim of that. Who the victim is going to disagree with me now? Who the victims are remains to be seen? The victims are the JPMorgan Chase. And worst case scenario, if you bought a car from these guys and you have a loan, you're going to keep paying it. So you can hardly call yourself a victim. Yes, we should say they very quickly in their chapter 7 filed a motion to replace the servicer on the Securitization Facility. so that they can keep collecting. So yes, unfortunately, when these things come crashing down, the end pay or of these loans never really gets a break. 'Cause it's an asset. - Yeah, this is like in 2009, when people were out there saying they didn't have to pay their mortgage, because there was a paperwork snafu at the MIPS. - Well, I was not disagreeing with you, Kevin. What I was just gonna say is, I don't think we know enough of the facts yet to know, it's like a chicken and egg thing, whether they were - Jays pledging the collateral. - So old school, you're waiting for facts. - I know, I'm gonna throw back that way. Were they double-bearing the collateral? - Very coin-ass. - Because they ran into trouble because of all the macro and policy headwinds you're talking about, or was the double-pledging always going on and just came to light and kind of coincided. We don't know yet. I think that's gonna be the interesting factual story here. But Kevin, I mean, you're the car guy. Have you, I know I play the super rich, not the guy on this, but I honestly haven't been to a giant-- - He's one of those old money people who drives like an 87 Jeep Grand Wagonier, - It's actually the oiled on the side. - Any early cartoons with the bull horns on the front? That's what I drive. - I mean, again, this just ties in for me. I don't think it's an isolated incident, notwithstanding the immigration policy issue and the sort of small niche they're in. This is just another aspect of America's complete need. I wanna say addiction, but that blames the users for the disease. The problem here is that nobody can buy anything now because of rising prices and because of stagnant wages. No one can buy anything without massive amounts of expensive credit. And so this kind of situation is going to spread. And we talked about Clarna. We talked about Las Vegas and travel. That's another heavy credit thing. Nobody can afford to travel without taking on loans nowadays. You simply can't afford to exist without borrowing money at high rates. And this is a sort of, I hate to use the cliche as a canarian, a coal mine. This is one of those to me, one of those situations where a lot of companies are in a similar position, loaning money to people who are paying 65% of their income and rent. And they're gonna have trouble making those payments and these companies are gonna have trouble. And nobody notices the double pledging of collateral until enough people stop paying. - Well, I mean, yeah, you're absolutely right on the consumer side. And I think it's also interesting here is that it's almost a similar story for the JP Morgan Barclays and what is it, fifth-order. It's kind of remarkable. - Best bank name ever, fifth-third. - They've been in a lot of cases recently, which is maybe not good for them. - Yeah, that's not good. - But when me and Jason are familiar with your lawyers, that's not good. - But what I was thinking about, what I was thinking about this company and this situation is I was kind of curious, what sort of interests do these warehouse loans pay? And it seems like, you know, from some quick googling, it's like, it's so far plus 400, which is not nothing, but-- - It's a lot less than they're charging the customers. - Completely, and I guess what I'm saying is that there's so much money that needs to be lent on in so many different ways. It's kind of remarkable that I suspect these banks were bending over backwards to set up these warehouse loans, even with the sort of tail risk that it would all come crashing to in it. And that's what worries me the most is that there was so much money looking to be lent out, that it's getting lent out in so many different strange ways. And I doubt that Sofer Plus 400 is really the right risk adjustment for something like subprime auto loans warehouse lending to a company that is focused in the Southwest and marginal communities. - Total US auto loan debt is 1.66 total real. That's more than stewed loans. - Is that included leases or is that a whole separate thing? - I assume that that includes the lease portion 'cause that's credit, whether they wanna call it that or not. It's more than stewed loans. - But you can't link Miami and not lease just to be clear. - Hey, I still lease here. - I tried buying a car. - My poor father and Pistachers, - Look at this Protestant work ethic on this bearded bastard. - Look at that. - I'm so embarrassed. - There's a car, lease it. You don't pay, don't buy a depreciating asset. Don't let that, that American stigmatization of credit, go out and get a Ferrari for $100, lease it for 102 months. - A $1,200 bucks a month. - The point is, - The point is, - According to 10 years, - What's, I mean 1.66 trillion of this shit. - Yeah, some of it's like high quality people borrowing 30 grand and putting 30 grand down on a silverado or something, boomers. Right? - Yeah. - But most of it, we're all subprime. And especially if you look at where the dealerships are in Arizona, California, Texas, New Mexico, these are places where wages are very low. And cost of living is lower, but it's still, you know, rent is rent. You gotta go, you know, you live in Austin, you gotta find a place to live. It's expensive there, but the minimum wage is seven bucks or whatever it was in 1983. Everything's subprime and banks and lenders are just pouring money into this because they're getting free cheap money from everywhere and they don't know what to do with it. - And this just doesn't seem like a sustainable economic model. - We've seen this movie before. I guess the issue here is, - In 2008 with the mortgage system, it was, - That was a multiple of that. - $11 billion. - Again, that goes to the systematic. - Yeah, the contagion system. - That goes to the contagion here in the financial system, but I'm talking about the contagion of our body broke. That's the contagion I'm concerned about. There's just, you know, American consumers are just struggling and so they're taking out these loans. And a part of the other problem is, of course, you need a car to exist in these states. I don't know if this business works in New York City 'cause you can get on the subway. That's my conclusion from looking at a business like this. It's not a structural issue. It's probably not a fraud issue. It is. - I don't know about that. - And even if it is again, a fraud issue, nobody cares as long as the payments are getting made. - Would you change your opinion if after I Googled a little bit the founder of this company, turns out he lives in Miami? Does that change your thinking? - Oh, it's a fraud. (laughing) Never made it. - Kidding, kidding. - Never, it literally would change my opinion. - I mean, it would change my opinion. If it told me I was running it. - I'm from Miami and so I wouldn't trust me. Don't give me money, people. - I think the, okay, so just on the contagion point, we should say, maybe you're just wrapping up, that there is some concern that this will put further scrutiny on other types of asset securitizations, which, maybe it's time to tighten up the, do a little belt tightening there. - What have you learned from the great financial crisis? If we had maybe heard some of the what have you learned from end stage capitalism? Nothing ever tightens up. Rates, nothing ever. Nobody ever says, I'll just clean up this situation, folks, and tighten our lending requirements and then you have people who, again, they did it in the great financial crisis and now you have people complaining how you can't afford a house. - Yeah. - Well, there's a reason for that. You could afford a house in 2006 with nothing, but that's a problem. Tightening is not gonna be on the policy agenda for the first year of futures. - We can agree on that one. - Especially because now the Fed has said, yeah, go ahead, free money. So, you know, that's the problem with this. We just keep sort of pushing it down the line. - Well, okay, Kevin, Tri-color pitched itself as an inclusive finance, trick, trick, color, but-- - Go-lor. - Bankruptcy showed that there's a lot of risks there and maybe some fraud on top of it. Do you be determined? - Props to my elementary school Spanish teacher, Ms. Jordan, the go-lor, upper pallet. Everything is by here, pay here in the modern capitalist utopia and the collapse starts from the foundation. Spoiler alert, the foundation is shaky credit for people paying 65% of their income for housing. - Okay, from empty car lots to a shopping channel trying to tick-tock its way out of debt. Let's talk QVC, Kevin. - Hey! - Jingle. ♪ QVC once sparkle every night ♪ ♪ Now the cash flows out of sight ♪ ♪ Where have all the profits gone ♪ ♪ Margin' shrinking before the dawn ♪ - QVC used to be the place your mom bought jewelry at two in the morning after she had a few too many Bartles and James Wine Coolers. Hey mom, how are the cats? Now it's buying tick-tock influencers to shore up a shrinking core business. Half their goods still come from China, so tariffs are eating into margins and cable cord cutting is cutting the audience. Also cutting the target audience for QVC, death from old age. Plus, you know, the internet, Christ, it's 2025. And the company just prepaid executives bonuses two years out, always an excellent sign. - Yeah, if you're a core audience, can remember the Bartles and James commercials during tough situation. - And this is coming through with the numbers. They tell you it's rough. Across QVC and HSN, home shopping network, viewership minutes are down, sales are down, customer count is down. This company is trying to reinvent itself on social media, but it never even bothered to reinvent itself for 2003. Should we move the signature Octas corporate Doomsday clock, 35.99 shipping included to one till midnight, to help us sort it out. We've got Octas senior distress data analyst, Simron Ball, who's been covering QVC's credit structure and potential outcomes and has amazing bone structure. Simron, thanks for being here. - Thank you so much for having me, guys. I'm excited to be here, even more excited to talk all things QVC, so let's just dive into it. - Yeah, let's start with what's driving the pressure of the company. On the surface, QVC is still shipping products, but how much trouble are they in? I got to be honest, my knowledge of this business is limited to the movie Joy, which wasn't half bad for sentimental slop, and the fact that you and Kevin worked on a very good piece about potential bankruptcy treatment for a billion dollars in deferred tax liabilities. So that's probably not a good sign for them, but what's going on? - Yeah, so there's a lot going on. I'd say overall, it seemingly appears to be a very simple business, but there's a lot going on behind the scenes, which will be the next. was mostly devised by John Malone, he's known for his convolutous structures. And this is a prime example of that. - This is cable business legend, John. - Yes. The cable cowboys, this nickname or something. He just, he published a book earlier this month. - Ooh, the cable cowboys. - But yeah, one of the, I was reading a synopsis and it said, he takes pride in structuring deals to preserve value and avoid taxes. I feel like this is a prime example. It's really convoluted. There's different silos of credit. Overall, now there's a $1 billion tax deferred liability. And it finally seems with everything going wrong at the same time. It's finally got the brink of collapse. So here we go. - Okay, hold on. Just wait a second. Wait a second. There's something Simran and I don't understand. - Yeah. - I don't understand. - You're saying this company's in trouble. You're saying that it's struggling. We know that it's not exactly got a favorable demographic. And yet this is very inconsistent. I heard they prepaid executives for 2025 and 2026 in cash. I mean, don't those big bonuses go to guys who are superstars pulling off an amazing B-school turnaround case study for a business that should have died 20 years ago? I mean, bonuses, if they're doing poorly, that doesn't happen, right? - Yeah, so surprisingly packed in August. They prepaid for nine executives, including the CEO and CFO, 50 and 100% of their target variable bonus for 2025 and 26. To retain them and obviously this is blaring lights that there is a restructuring coming in my opinion, most likely a bankruptcy. - Yeah, just for the civilians. This is the reason we always break when we get that 8K that says that a company is paying. - Equity bonus is in cash. - It's bonuses because since so much of their compensation is tied up in equity, the equity is gonna be worthless in a bankruptcy, paying these guys in cash is a good hint that the equity is worthless, that they're gonna file and to keep these guys around. And on the inside of the tent pissing out as Lyndon Johnson would put it, they have to pay them. So yeah, it's not a good sign. - I don't think he usually, this seems particularly aggressive, right? To front load and cash all the-- - Wait, to all compensation for two years is a lot. - You usually switch the future payout from equity to cash so you can at least get a claim for it in the bankruptcy, but to prepay it. - And there's usually a discount. - Maybe they're looking to do something out of court, but hey, before we go out, this is great. I looked up John Malone's book, Kevin, do you want me to read the whole title to you or break it off into parts? Do we have enough time for the entire title? - It's called Born to Be Wired, colon, lessons from a lifetime transforming television, wiring America for the internet, and growing Formula One discovery, serious XM and the Atlanta Braves. - I like one of those things, but-- - Yeah, that is an on-the-ing boomer. - Right there. - All right, but back to the company itself. Simran, one of the things we really wanted to get into because a lot of our listeners and the folks tuning into this are on the younger side. QVC is doing something really interesting with TikTok, right? Because the numbers that they report, I saw in our earnings analysis, are sort of all X TikTok strategies and stuff going on. And those numbers were all bad. Is there a, something TikTok is part of what they're calling a win strategy? Is that an actual lifeline or sort of a flash in the pan? - Are they just doing something to do something? - Yeah, yeah. - Well, it seems like they're investing heavily, however, there aren't too many metrics to support that. Their cat-backs is actually going to be down this year. It was 170 million last year. Is that estimated? - On TikTok or general. - In general. And so they are spending a lot more on advertising. So the year over year advertising is up like five to 10% for the quarter so far. The main push is taking a step back first. Now on an annual basis, their customer count is around 7.2 million. At its peak around COVID, when everyone is at home, you know, your channel is surfing, you end up buying something from QVC. - They were around, I'm sure we've all done that. - I will. It's 7.2 now and it was what before? - 11.6 before. - Oh, wow. - So it's come down a lot. Recently they said, they finally gave us some metrics. So they said 100,000 people purchased from TikTok shop. They said about double-digit percent of total domestic revenue was from TikTok. - Yeah. - So basically this is an affiliate marketing company. - Right. - That's real business though. So what are they doing on TikTok? Exactly. They have their own channel there or they just see influencers. - I did a deep dive into this. - Oh yeah. - Cool. - So I went to their TikTok account. So they have pretty much throughout the whole day, live hosts doing their normal QVC networks, but now it's just on TikTok live. On the other end. - New people are their talent from the TV show. - There is a lot of talent from it. - I heard they got talent. - It's their talent. - I heard they got more crim. The dazzle that TikTok. - But there is some new talent and collaborations. However, there's this weird side if you go to live. There's a bunch of random people that don't have much of a following, but they're just on live all the time selling like a water bottle or skincare or like a vacuum. - And this is really big in China, right? This is like a huge part of the online economy in China because people selling little things and like one off streams almost. - Yeah, and I'm not sure how sticky this is 'cause QVC it's based on a really sticky customer account. They have their ladies that are 50 years and older. Now their kids have left for college. They have a lot of time and a lot more disposal. - Kids don't call 'cause they keep talking about Trump. - Yeah. - So missed call, mom. - Yeah, but as Kevin was alluding to they're sort of dying out literally. - And the. - Yeah, 11 million to 7 million during the COVID era. I mean, we can all kind of see where the math goes with that. And those COVID customers were not sticky 'cause like you happen upon QVC, I feel like QVC is the host are trying to persuade you to buy something. It's never a necessity you would go to QVC to buy. Like I wouldn't, if I need soap or I need toilet paper, I go to Amazon. - Right. - It's like purely disposable income and it's high time. - And then most extreme case, some of these sticky consumers would actually have like favorite hosts and they'll like tune in to see what they're selling at that time. - Exactly. - And like they have a new sweater, they're really excited. - Yeah, I mean, it's like a sort of captive influencer situation. - Exactly. - Right, where you have your own influencers on your channel and they're selling your stuff instead of just sort of saying, oh, we love this stuff. And you getting a cut, they're actively selling for you. - But if the 17 year old next door to me has a TikTok channel selling water bottles, it's QVC running the store side of it. What's QVC's cut in that process? - What I gathered was there's usually a link below at the TikTok, so that goes to the QVC link. And there's some sort of commissions or something that based on if they hit a certain threshold of purchases, you get like certain bonuses, but there hasn't been much information disclosed about this. - That's just like I heard. - Did they co-opt Amazon? 'Cause I mean, Amazon did that all over the blogs. I mean, Kevin and I are old enough to remember the blogosphere and there was a whole thing where when they would talk about a product, they'd have an affiliate link to Amazon. And if you bought with that link, the blog person would get a cut from that. - I think it sounds affiliate marketing. - Yeah, wire cutter. - And they have a whole partnership with TikTok. So they're working hand in hand to make it as seamless as possible. - Who else is doing this? I'm fascinated by this idea, but the QVC can't be the innovator, right? - There's a sentiment that most of these products usually aren't what they're advertised to be. They come in their sh*t, their quality. And it's a hassle to return them, et cetera. - I mean, are they just drop shipping sh*t basically? - It seems more-- - Well, not over. - I feel like with QVC, you have the infrastructure. And it'll probably is easier to return something that doesn't appear to be added. - Yeah, well they have warehouse, but now they're not really doing the stocking and the storing like Amazon does. - Yeah, I mean, I'm almost a boomer, and I have to say I will buy something more random from Amazon because I know it's super easy to return. - Exactly. - They won't give you a lot of credit. - I can't imagine what it's like to return something from a drop ship TikTok store. - Well, it'll get to you fast. - All right, you know what, producer Tony Hubbard is telling us in bold in our script that she has purchased stuff repeatedly from the TikTok shop, enjoys it, and wants to defend it. - It is real. TikTok shop US sales, right, are up 120% year over year. And there's like Simrons had a very little way to sort of clarify this or confirm this. And this is a famous company run by a famous bullshit artist as you can tell from that book title. So, you know, taking it with a grain of salt, if the total US social commerce market, which is what we're talking about, is 85.6 billion in 2025. TikTok shop captures 20 to 30% of that, 'cause it's a big player. TikTok shops GMV in 2025 could be 15 to 25 billion, you know, I guess QVCs at the very least got something to hang its hat on for a future strategy in the first day declaration. - Well, that's what now we get to the-- - They've got a basis for the bullshit valuations and financial projections. They're going to attach to this plan. - The octas, you know, play the theme song, but the bankruptcy boys. (upbeat music) The bankruptcy guys Kevin and Jason are here. - The get excited when you have a shitty company with one little island of good stuff and 'cause it gets really complicated when you're, and you have a complicated cap stack. What if you, if the future is the TikTok shop, which debt is betting on that and which is going to suffer from the traditional? - Who's going to get the spin off of the TikTok shop in the chapter 11 or liability management transaction and drop this down to a new finance entity? - So all of that value would be at the op-code, so QVC ink. There's different layers, there's QVC ink, Liberty Interactive where the tax liability-- - Haveability. - Well, it's not tied, it's a similar name, but it was fun off of that. - It's not long enough. - Yeah, it was fun off of that. - Okay. - And that's why there's this weird exchangeable debentures that are exchangeable into T-Mobile and Luminstock, which is super random. - Lumin. Yeah, so. Yeah. So, and then there's the parent code where the equity and the preferred stock is. So all the value in the TikTok is at the op-go, QBC Inc. And there's currently now with the RCF drawdown, about $5 billion of debt there. They did big draw on the revolver, which like changing your exact compensation. Oh, like that, because we got a filing coming out, baby. Spirit. So, the spirit just did that trick. Very 2020. The RCF is a next facility due in October of 2026. They drew down another billion dollars, so they maxed it out essentially. Taking away the RCF lender's temporal seniority, I think it was a great negotiating tactic by the company. So now you're bringing in these lenders at the table. There's a co-op agreement that's been formed. Are they the biggest lenders at the Inc. box? Or no? The revolver. So the revolver's about three billion now, but then there's another two billion of like seven series of different QBC notes. And then does Inc. guarantee any of the crazy shit happening above it in the cap stack? Or is it? No, it doesn't guarantee. There are carveouts to send money up to pay down, like Liberty. Okay, but not, but no guarantees. To look, they set up, they set up the revolvers, generally the least aggressive and least demanding and obnoxious lenders as their, you know, we see the bankruptcy all the time. Revolvers always agree to whatever and just roll it through. They purposefully drew those guys down with their maturity while coming, knowing that it's easier to deal with the revolvers who are banks than a bunch of obnoxious hedge funds. Is there any value? Is all of the value at Inc. Simran? Or we just the TikTok stuff just there? So all of QBC is actually a pretty big business. It's $10 million top line, which converts into about $1 million of EBITDA, which is insane. Crazy. Yeah. It's 2025. Yeah. I guess. Yeah. And so the company is estimated they want to get to $1.5 billion from TikTok and social media from those networks coming out of 2027. But we'll see how successful that is. And then we'll see how successful they say it will be in the first day deck. Because everything you're saying, all I hear is chief restructuring office or first day declaration. And it's interesting. So the RCF, apparently a lot of distressed shops have bought into it. So there seems like there might be something aggressive that's going to happen. There might be a nonpro rata uptaring within the RCF. Yeah. What I saw they have a RCF has a cooperation agreement with 75% of the largest art board. Jason, have you ever seen a revolving cooperation agreement? No, for sure not. And it's all it gets really bad when the revolver and the in the Perry, you know, regular credit facility are at loggerheads. It's bad when the revolver inside the revolver, they're fighting that. And they're all Perry and they're only secured by equity of the op code, not even any hard assets. They don't have a 14 karat gold chains that they're selling by the foot. They don't have a lean on that. Seeing them in that. But you're saying that, but you were saying that the revolver and that other $2 billion in debt at ink are structurally senior to everything else. Yeah. Maybe this tax claim that we can get into. Yeah. So there's structurally senior to about 1.6 billion of liberty and interactive notes. Oh, so there's not a ton of debt about, there's not a ton of. Yeah, so there's not a ton of structurally subordinated debt, but the Lenta notes are, okay, probably SOL. Yeah. Okay. What are they doing? Do you know offhand what they're trading at the Lenta ones? Like $0.15 on the dollar. Can you short this? Well, off the run, man, off the run. Don't pull that shit. I mean, what it sounds like to me is what really interests me as bankruptcy guys in the jingle. What interests me is it sounds like this is a prime situation for the theory in the Wall Street --I think it was a Wall Street Journal, the FT that came out with an article about the Kirkland guys about a month ago. It seems like an ideal test for the question of LME versus bankruptcy. Yeah. Is this an LME that resolves this and I don't think it'll actually resolve anything, but is it an LME that pushes this manufactured creditor conflict? That doesn't make sense for us, Kevin, except that the way they structured that executive payoff is not bankruptcy planning. That's LME. No, that's right. No, I agree. So the question is, is this the real litmus test, the first like great test case of the LME as a substitute for chapter 11 bankruptcy situation, which seems to be a hot topic? I guess the -- because a lot of these cases were just reshuffling the deck to file, right? You just -- Yes, right. They knew they were going to file it. They had a very good idea they were going to file, but this is a fascinating situation. It's much more complex than that. It's a real business, however, and outdated and ridiculous. Well, your LME and you two years passed your preference window for your payout to your executives. It says bankruptcy guy, but you know, John Malone's a smart man. But that's what it sounds like to you, Sid. That's why we should watch this. It's fascinating. You think it's an 11 right now, but we should all bet. I'm going to go -- I'm going to go LME. Kevin, are you LME or bankruptcy? My bet will always be on bankruptcy, baby. So whether that's -- that -- an LME happens first. Oh, that's a little bit of a -- that's a little bit of a -- That's how most LME situations end. I would say it's most likely an LME. It's going to be followed up by a filing that it's going to crystallize. It's going to crystallize that you screwed over these non-participating lenders, and you'll deal with a tax liability most likely through bankruptcy. Yeah, well, because tax liabilities, the government, you know, the government, as I have -- as I said in the article, and as I tell the FAs all the time, the government generally doesn't push the tax claims. Well, before we get it, we -- somebody -- one of you guys, Kevin and Simran wrote an article about this, but there is an enormous -- in a very high level, there's an enormous deferred tax liability that was created, by the way, these notes were structured. So Simran, what's going on with the billion-dollar tax liability, tell us? So there are these weird, exchangeable debentures, which I mentioned earlier that are exchangeable until Lumen and T-Mobile stock. For tax purposes, their interest rate is like 9-10 percent. For cash coupon payments, they're around 4 percent. So you're getting a bigger tax shield. So you pay less than taxes because your interest for tax purposes is higher. And so while you pay less currently, it builds this deferred liability that you will have to pay out maturity. Which we estimate. The U there is the holder or the company. The deferred liability is on the company or the holder of the notes. So the company. So the company -- Okay. When it pays out the coupon. Right. It's a tax break for the holders and a tax liability. It transfers -- it effectively transfers the tax liability from the holders to the company. Yeah. And we have a very good article about how all the complexity of how that would be horse-traded, negotiated, and sitting in the bankruptcy. The most interesting thing, I think, for the conversation we've had just now, and you guys correct me if I'm wrong, but there is a chance that this tax liability because it's a government obligation could be an issue across the entire company and the -- it won't necessarily stick to the structural boxes that the other debt would. Yeah, because it could be an issue for everybody. But only if the government decides to push the tax claim. And one of the reasons this company could file bankruptcy or one of the reasons that might motivate them to file bankruptcy instead of just doing a liability management exercise is that in bankruptcy, federal government is usually pretty lenient about pushing for payment of its monetary claims, like tax claims, environmental remediation, selling opioids that killed half of West Virginia. These kind of claims that the government's hold are generally written down heavily and not accounted for as a huge player in the reorganization. But outside of bankruptcy, if they're trying to buy back shares, do dividends, the kind of stuff you do outside of bankruptcy, the government's going to be a little more aggressive collecting on that. So it's one of the reasons why the company might want to file. Yeah. Hey, Simron, thank you so much for coming on. Thank you very much for having me. It was nice talking about this linear decline. From a shopping channel in denial to an MBA star in bankruptcy filings, it's time for our client-learned updates. Or is it Kauai Leonard? Kauai Leonard update. You tell me Jason. All right, Kevin. Last episode we walked through the scandal around Kauai Leonard's $28 million alleged no-show endorsement deal with the bankrupt carbon credit company aspiration now known as CTN holdings. That contract ran through run through his LLC, Kale to Aspire, has become the center of both an NBA investigation and a bankruptcy court mystery. And we have an up. Yeah, we do. We're hearing on September 18th, the trustee, the chapter seven trustee. And for you, for the civilians, the noobs, the folks on NBA subreddit that are panked into this for some reason. The trustee, when we said that chapter seven trustee, the person appointed to handle chapter seven liquidation cases, just to be clear, this is not like, this is a baggy pants lawyer, one of like 10 guys on a panel. And they get randomly assigned to this. Some poor bastard had this randomly dropped on his skull. So the trustee or her, the trustee pressed former CRO chief restructuring officer, the guy who's in charge of actually looking at the assets of this company and getting it through chapter 11, James Staglich about the agreement. And Staglich said he had quote, no knowledge of any relationship between CTN and Leonard. He suggested the truck trustee talk to former general counsel Michael Schickerow and and claimed he only learned about the contract with Kauai. the $21 million paid, the $7 million creditor listing in the schedules that he only learned about this from recent media reports. This is at the initial 341 meeting of the seven. And I guess the trustees trying to get their head around it, but that for the civilians, that kind of fits into the story we've been painting of there being a big disconnect between the allegations from Pablo Torre and what was disclosed during the bankruptcy process. Because well, alternatively it shows the big gap between what was reported in the bankruptcy case and the bankruptcy filings in reality. Sure. I think that's right. We're not being critical of Pablo. He's doing a great job on this. No, no, no, no, no. Okay, fair enough. Yes. One of these things, both sides can't be true at the same time because a contract worth $28 million is one of the NBA's biggest stars. And the chief restructuring officer, this was like a high one on the list of creditors. And it's like, we're just finding out about this or we hadn't heard about it at all. Maybe ask the former general counsel. It's not that. It asks more questions than it answers. Yeah, I hate to break out of fancy legal term when we're trying to build a more general audience with the NBA types. But as the famous Roman Orator, Cicero once said, after six or seven thousand words without a verb, quote, this is complete and utter horsh***. This is completely not believable that he didn't know about. If you're this CRO, you are brought in and paid a monthly fee. You're a specialist. You're a hired gun. You are brought in to get this crap company through bankruptcy intact or without anybody getting jailed for fraud. And if you're going in and you're getting paid again, a monthly fee, you got counsel getting paid an hourly fee. Big fancy counsel, it's saidly. You are getting paid to get to the bottom of this yourself before a trustee might get to it. And the idea that he had no idea that a $28 million endorsement contract with a guy who played for the clippers. And after they had the investments from Balmer, the owner of the clippers is insane. The counsel just so everybody knows, the debtor continues to exist after the trustee is appointed. It's the company and it's sort of shorn of all assets, but it is a thing and the trustee has his own. So this is just to break it down super simple. The contract was basically not discussed in the bankruptcy. We found out, you know, right before other than listing Kauai as a creditor. Yeah, other than listing him as a creditor. We found out that instead of it being sold to the credit bid purchasers of the company, it's staying with the estate, which means that it's a potential asset for this chapter seven trustee to use to recover money. Right after they were shamed into doing that by all the public pressure. And then at the very first meeting in the chapter seven case, the trustee asked the CRO like, hey, just so we can, you know, get this giant multi million dollar asset going, what did you know about it? Like the first I heard about this was when it became a subject of media speculation. So I think that raises a lot of questions. If this is one of those situations where either he is lying and knew about it or if he didn't know about it, it's because he was either incredibly negligent in his job as a CRO because you're supposed to know about the material contracts and creditors of the company that you are the chief restructuring officer of or it was sort of willful ignorance that nobody told him and he didn't ask any question. Well, right. And that's the thing. What I thought of for this is if you think about if you ever use a tax preparer, they don't, they're not liable for your taxes being correct beyond what you provide them with. So if you don't provide them with a bunch of information that makes your tax bill higher and the government finds out it's not your tax preparer is a problem. So the, but that's a little bit of that makes it even bigger problem. What that means is management. Hit this right this year. There's kind of only a few options here. Look, but the CRO has to ask the question, co-I Leonard is owed $7 million here. And that's what I was thinking is the difference between a tax, that's a, that's the CRO's job. That's a, that's a different kind of tax preparer and the CRO and a bankruptcy is that you, you, you do need to ask those questions. You need to kick the tires a little bit and you're getting paid hundreds of thousands of dollars a month, whereas your tax, but you know, my tax preparer, Morrie on, you know, 48th Street gets $750 a year. I mean, really, really simply one of the reasons companies don't file for bankruptcy all the time is you're supposed to open up the kimono and have this big sort of flashlight on everything you do. And apparently in this case, this giant sketchy, allegedly sketchy contract wasn't, you know, the kimono might have been open, but nobody saw the nasty bits. Well, he's saying, oh boy, we could really torture this metaphor. But the important thing is, yes, there is the disconnect between the CRO and his knowledge of the situation and what has come out to be the actual situation in reality. There's a huge disconnect there and that is very troubling. Yeah, it is a, it could very well be the bankruptcy process completely failing. Well, I don't blame them, but you know, I love, I hate the bankruptcy process and think it's total fraud 99% of the time. But this isn't the bankruptcy process failing. It will be a failure if they don't get to the bottom of this. Okay. The bankruptcy process is debtors that when they file for bankruptcy, they're going to be upfront with their assets, their liabilities and their dealings with employees. The potential assets contract. And all those things. And until some evidence is presented otherwise, the bankruptcy system lets they stem staying control of the company and let's them do what they want. Now that this has all come out, the digging has begun. What will be the question is whether the trustee really wants to get to the bottom of this or whether how much they are going to pay the trustee because the usual solution here is somebody pays the trustee to settle these potential claims to recover the 21 million that went to Hawaii. We don't know the quite number, but yeah, million. Right. Whatever it is, whatever money he got for not doing work. In the appropriate look back when they're like, correct. But Kevin, here's what I'm trying to say. I think there's a bankruptcy process failure before what you're saying. You're like, oh, if it turns out, if we get to the bottom of it, okay, great. But I think it's actually a failure. I'm not supposed to be a conspiracy guy, but I think it's a failure that the only reason anybody's talking about this is the news reports in Pablo Torre. Absolutely. If that podcast hadn't come out, this conversation would be happening at the thing. The creditors wouldn't be recovering the money. Contract would have gone to the buyer. Maybe gone to the buyer. Maybe just kind of sat there with the trustee for a while and me, you know, who knows? Yeah. I mean, I'll try my best. But obviously you're coming around in my way of thinking. Well, it is not good for the process that it took a independent podcast investigation because an NBA superstar was involved to uncover this giant question mark for the case. Yeah. No, that's true. But I just, again, it's built in, it's not so much a failure of the people working in bankruptcy as it is a failure of, you know, there's a lot of trust given to companies that file for bankruptcy by the system. And just to be super, super clear, every one of the professionals involved here could have been actively and affirmatively misled by insiders of the company to cover this, intentionally to cover this up, which would lead to other causes of action against those insiders. But that's got to come to light now. Somebody's got to look and do it. Yeah, I'm sure they're all totally again. If you don't know and you had a duty to know, that's a problem. Yeah. That's the issue. And it keeps, I mean, the best part about all this keeps, why stuck in a spotlight, he definitely didn't sign up for at least not knowingly. Did Kawaii know? Word from the Kawaii camp is he is scowling joylessly and getting injured with more than his usual intensity. Oh, definitely. That was Kevin Joking, just very, very, very. Okay. Have you ever seen Kawaii Leonard happy? Come on. From NBA contracts disappearing in bankruptcy to unknown spam calls. We're closing this week with a Netflix documentary that feels like it shouldn't be real, but sadly is. Unknown number is about the chaos that comes when anonymous calls stop being harmless spam. The film shows how a simple ring from an unidentified caller can unravel lives. People answer the wrong call or read the wrong text message and suddenly they're dragged into scams, harassment or worse. What makes it a hit is how ordinary it feels except that the twist in this one is absolutely bonkers and crazy. I mean, do we give it away? Are we not doing that? We have to. Give it away. Give it away, man. Spoilers alert. Kevin's been on the top list at Netflix for a while. It's a documentary. It's a true story. I knew. I knew going in. Kevin knew about this before. It's a true story, but it's about a series of thousands and thousands of terrible explicit sexual sexually charged, lurid, harassing text messages, moved by a junior high-school freshman couple. And it's about two hours long and for about half of it, the big mystery is who did it. And then in the middle of spoiler alert, we find out that it was the victim's mom. A teenage girl's mom was cyberbullying her intensely and explicitly. And the real reason never comes out. It's kind of just yada yada. Like it just happened. Oh, I got that. I mean, the whole thing. Yeah. The whole show is basically documents the complete and utter failure of adulting from everyone involved over 18 in the situation. Yes. You have the idiot cops who go around like, they bring all the kids in and want to look at their phones. They assume it's the kids. Nobody thinks for a second that it might be an adult and a parent. And what it really made me think of was K-pop demon hunters. We talked about this. One of the things I loved about K-pop demon hunters was the pop-up. positive, refreshing view of social media. interaction and sort of anonymous friendship and group connections that can be created only on the internet. It can bring communities together and this is the opposite. It is adults fucking with that and everybody's trying to blame the kids for it when it is in fact adults nosing in and K-pop demon hunters didn't have that. The kids got to interact. It is a parent going in and just going absolutely insane. It reminded me of the whole Satanism scare of the A. Oh, moral panic. Yeah, it is basically reminds me how the whole social media is a cursed thing is a moral panic created by adults and then they try to drag the kids into it and in the end it wasn't the kids at all. It was the adults who ruined everything. You're talking about the mom who's obviously just a terrible, terrible, terrible person because she's mentally ill. Yeah, clearly mentally ill. But then there's a whole other level to what you're saying is still true is that this documentary, I think the reason why people are kind of fascinated by it is they have everybody involved. They have the superintendent. They have the security guy at the school. They have the local sheriff. They have the FBI agent that comes in at the end. They have all the friends talking about it. All the friends parents talking about it. It's essentially like yeah, like for years I think this went on and it wasn't until the end that the FBI agent came in and was like, well why don't we just put a tap on this number? They hit it as subpoena. Well, there's nobody ever thought of getting us to sending us a subpoena to the VPN company. This 14 year old girl is being harassed about her, you know, somebody else like taking her boyfriend to a hotel and what the person is doing with the guy and like that's not enough for a subpoena after a thousand messages. Yeah, it's clear failure is on adults on all sides. Like the parents, the police, the school, apparently everyone's just texting and using their phones all the time. Don't you have to keep them in your locker or something at least? Like these people are just wandering around the halls. Why should the kids have to keep the phone? I guess here's where I'm really going. Why should the kids have to keep their phones in the locker when it's the fucking mom doing the cyber bullying? Maybe parents should have to give up their phones. Yeah, you know, it's the classic like the kids aren't all right. I don't know if I'm wrecking this. I don't think we're recommending this show. So for those of you who are fortunate enough not to have seen it, it's worth just going over the basic fact pattern. Well, the form of the show is just classic. If you've seen one Netflix true crime documentary. But the facts are so basically there's a eighth grade couple and that's innocent eighth grade couple. They like they got together because they both like sports and it seems like one person might have been mad that one girl might have been mad that this couple happened and they were going to go to this girl's Halloween party and that kind of kicked off some text messages. That nothing else, it all just went away. And then a year later this torrent of text messages starts and goes on for thousands of pages when they're printed out 40, 50 a day to both the boy and the girl. And they're printed out real old. Yeah. Well, no, no, no, the police officers will look at these. It's like somebody clearly trying to break them up and trying to talk about the texture should be with the boy instead of the girl and how the girl's not worth it telling the girl to go kill herself. And then like this is her mom, the whole time just a reminder. It's her mom doing it. Like maybe the initial and then she keeps saying, well, I wasn't the first one to start this. So maybe at the Halloween party, those texts were some junior high shit. The mom clearly cops to sending thousands of horrible sexually explicit messages to this poor girl. And then they have all this body cam images from when the cops go to confront her and she's there with her poor daughter and like holding her and like, well, I can't leave my daughter and the daughter is just like put in this terrible, terrible position of her mom like needing her love, but also her mom being the reason why she's been through hell for like a couple of years. The father is not exactly a pillar of the children. No, no, when everyone, how could you possibly be? Every adult in this community should be rounded up and sent the guantanamo. Every single one of them. You know the absolute worst Kevin, the absolute worst is that super intended. I mean, why allow this to why allow them to film in the school? Like you're you filled your job by allowing them to film the school. You failed your job by doing this and then you failed your job by being such a goober when they film you. What I mean, if if you are running an organization or you have authority and someone comes and says, can we film a Netflix documentary here? The answer is no. The answer is no. Even if they do the thing, let me do the little secret, which is like, well, we got everybody else but you. So your story won't come out. They're fucking lying. That's what they say. They put a lady, but they're putting the whole hook on you. No. They're pretending to chlub. You got you say no. You do not get involved. But yeah, everybody's got to have attention. Everybody's got to have their moments of celebrity. And that's really what the mother was about, right? You blame the mother for doing this sort of young cow's and weirdness with her daughter. But everyone in town is doing the same thing by participating in this situation. But my note though, they have the mom doing her normal interview as if she's the mom and she's worried about she's like, then we went to the school because we were so concerned. Like she's for the first half of the movie, she's like, talking as if she's the concerned mom, then the bombshell drops and then she's talking to this confessatory like, yeah, I don't know what got over me. But my note is they never pushed her on why she did this to her daughter. No. She felt like it was a bad relationship for her daughter to be in and she was trying to break it up in this terribly John's way. Was she? They kind of allude to maybe her having a crush on the boyfriend, which is also obviously terrible and disgusting. Yeah, they just don't answer that. And that's my note. It just plays into my view that adults are awful nowadays. Myself included, this is a real issue that adults are getting increasingly involved in their children's lives in very bizarre and arcane ways. It is not the helicopter parent thing. I'm not talking about parents like organizing their kids days and all that. The interference in young people's lives is getting increasingly sort of diseased and curdling to the adults. Go watch another, if we spoil this for you, go watch American Vandal. That's brilliant. There's a whole history of these movies and documentaries like checking in with the kids over time. I hope this one isn't it for this generation because God, this is just a horrible, terrible story. And disturbing though, is it isn't strangers on the internet. It's a mother targeting her own daughter and she gets this platform to talk about it and never really even attempts to explain herself. That's a bummer. Netflix says it's raising awareness about cyberbullying. It's actually raising awareness about what a bunch of shitheads we are all right now. All right, well, on that positive note, that's the wrap on this week's Octus Download. That's it for this week's Octus Download. We hit Tri-Color, QVC, and our favorite case in recent memory via a Kauai bankruptcy update. The story is always find a way to connect whether it's cars, cable cords or caller ID. Star 69, that Jet H A CIS. Remember call waiting? Oh my goodness, party line. All right, a big thanks to our producer, Tanya Hubbard, who pushes us to be better, smarter, and a little more interesting or should replace us. And as she likes to say, that's show business, baby. If you liked what you heard, make sure to follow us wherever you get your podcasts, apples, Spotify, any album, QVC. We'll be at QVFresh QVC podcast. We'll be back next time with even better stories you might not care about without us. Until then, keep screening your calls and remember, you're a dream for Insomniacs and a prize in the cracker jack. Bye. [Music]