In a week that has been nothing but bad news for THQ, I’m sure that investors thought they could take refuge in a weekend devoid of trading. Unfortunately, in a notification of late filing of form 10-Q sent to the SEC, another bombshell has dropped. THQ has received notice from lender Wells Fargo of default on their $50,000,000 revolving line of credit. $21 million of that has been drawn according to the second quarter results released earlier this week, which sent the publisher’s stock into a tailspin.
Form 10-Q is a mandatory document that must be submitted to the SEC every quarter. It reports financial performance and relevant disclosures that impact how investors value the company. The notice of late filing is filled with information we already know, like the uDraw tablet failure and, more recently, the delays of three key titles slated for early 2013. It appears that the filing was strategically delayed to ensure release after the close of the financial markets on Friday, giving investors the weekend to cool down from the bad news.
This section from the filing says it all,
In connection with the Company’s Credit Agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”), which was amended pursuant to Amendment Number One dated July 23, 2012 (collectively, as so amended, the “Credit Facility”), on November 7, 2012, the Company was informed by Wells Fargo that loan availability on the Credit Facility was less than 12.5% of the maximum revolver amount on one or more occasions as of and after the fiscal quarter ended September 30, 2012, and accordingly, one or more events of default have occurred under the terms of the Credit Facility, including the failure to comply with financial covenants for the fiscal quarter ended September 30, 2012.
The document goes on to indicate that THQ is in negotiations to repair the credit line. Were it to disappear, the publisher’s cash flow would be severely impacted. Additionally, they don’t have the funds to repay the credit right now. No other lender is going to bail them out, either. Were this to happen, bankruptcy seems like the only reasonable outcome.
I had the opportunity to speak with analyst Kevin Dent regarding his interpretation of this turn of events.
“Wells Fargo has THQ in a corner. They can either show leniency and grant an extension or call in the loan. Given that THQ is already in technical default, it’s unlikely they’ll be able to negotiate for more money or time,” Dent told me. “It’s like a bicycle playing chicken with a truck. It’s not going to end well for the guy on the bicycle.”
This week already saw an enormous drop in the stock value, with a 50% drop evidenced between close of business on Monday November 5, 2012, and the following day. The stock managed to stay above $1.00, but according to Dent,
“I expect material news by Friday of next week.”
As for the future, it is unlikely that a competitor will purchase any of the franchises that have been the foundation of THQ’s survival to this point. There is a lot of value in the Saints Row franchise, for instance. EA, or another publisher, will simply swoop in if bankruptcy is declared and pick up the IP for relatively little. It’s the same thing that WB did when Midway went out of business.
One thing that Dent shared was about how licensed arrangements typically work. In many cases, should a publisher declare bankruptcy, the developers involved will be entitled to any funds paid and retain possession of the code already developed. If this is the case here, should a publisher wish to continue the work on South Park: The Stick of Truth or use the existing framework for a new WWE title, they’ll not only need to negotiate with the license-holders, but the developers as well.
This tale seems to be winding to a close. We can only hope that those employees that may be affected find work quickly and the titles we love end up in loving homes. If you are interested in the full filing, it can be downloaded here.