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Alabama Pension Funds Star in IPic Theater Bankruptcy: Brian Chappatta

The Retirement Systems of Alabama agreed to provide a $16 million debtor-in-possession loan to the movie theater chain.

(Bloomberg Opinion)—To some, David Bronner may be the most powerful man in Alabama. He has managed the Retirement Systems of Alabama since 1973, when George Wallace was in his second stint as governor. As chief executive officer, Bronner is in charge of about $44 billion of assets used to pay the state’s retired judges, teachers and other public employees.

A 2016 profile in Governing focused on Bronner’s decision to use that pool of money to improve one of the poorest U.S. states. “We’ve got to invest in ourselves,” he said at the time. “We are the only player in town. There isn’t anyone else.” Indeed, Bronner bought several office buildings, hotels and golf courses within Alabama’s borders and effectively built Montgomery from the ground up.

But to suggest he confines himself only to in-state investments would be selling him short. The Alabama pensions, for example, own 55 Water Street in New York’s Financial District, the largest office building in Manhattan and home to tenants including S&P Global Ratings. On its website, 55 Water is described as the “debt-free, flagship investment of the Retirement Systems of Alabama.” More recently, the funds became the sole owner of CNHI LLC, one of the biggest U.S. local newspaper chains.

All that serves as background to the news this week that the Alabama retirement system is a crucial party in the bankruptcy of luxury movie and dining chain iPic Entertainment Inc. of Boca Raton, Florida. The company, which happens to have a theater less than half a mile from 55 Water, sought Chapter 11 bankruptcy protection and is looking to sell itself not even two years after its initial public offering.

Bronner’s funds, it turns out, have poured money into iPic. They own almost 40% of iPic’s Class A shares, according to data compiled by Bloomberg. As the shares fell and financial difficulties intensified, iPic failed to pay $10.1 million in interest to the retirement system and still owes $204 million on a credit facility. “We do not have adequate cash on hand or other available assets to repay our outstanding indebtedness and RSA could foreclose upon the property that is pledged to secure the credit facility, which property includes substantially all of our assets,” iPic said in a filing.

Downward Spiral

To help keep the theaters running, the teachers’ and employees’ retirement systems agreed to provide a $16 million debtor-in-possession loan to iPic at an interest rate of 10.5%. About $12 million is immediately available, and in exchange, they get a “superpriority” lien above about all of iPic’s other pre- and post-bankruptcy debts.

According to Bloomberg data, the Alabama pensions acquired their position in iPic in the third quarter of 2018, when the stock was trading above $6 a share. The price has since tumbled to 56 cents as the company’s 16 theaters faced increased competition from other chains that upgraded their seating to offer similarly comfortable viewing. “Our brand is thriving and leads the industry in popularity, but our balance sheet needs to course correct,” CEO Hamid Hashemi said in a statement.

Neither Bronner nor the communications department returned emails requesting comment on the investment in iPic. Bloomberg Law’s Daniel Gill also didn’t hear back from attorneys for the Alabama teachers’ pension fund. Hunter Harrell, director of private placements for the retirement systems, told the Wall Street Journal that iPic is relatively small compared with the size of the funds overall, that it’s “a good business that is having issues now,” and that “hopefully we get it worked out.”

That doesn’t provide much insight into what they saw in iPic in the first place. Perhaps it was as simple as it looked cheap. Around the time of the pensions’ purchase, shares were trading at less than half the IPO price when the S&P 500 Index was setting new highs. The premise of the theaters makes sense, as Harrell said, given customers now expect a moviegoing experience to offer more than they could get at home watching Netflix or another streaming service. In bankruptcy documents, iPic describes itself as offering “high-quality, chef driven culinary and mixology.”

The move speaks to the lengths to which defined-benefit pension funds have to go to hit their targets in an era of ultra-low interest rates. As I wrote recently for Bloomberg Businessweek, without the option to pad returns with mid- to high-single-digit yields on top-rated bonds, managers have had little choice but to branch out. It’s not as if Alabama is alone in this regard. The largest U.S. public pension, the California Public Employees’ Retirement System, made headlines earlier this year because a helicopter crashed into the roof of a midtown Manhattan office building that it bought for $1.9 billion in 2016.

Under Bronner’s direction, Alabama’s pensions have been steady if unspectacular. They had a 70.9% funded ratio as of 2017, about average compared with other U.S. states. Alabama is doing better than neighboring Mississippi, which is only 61.6% funded, but trails Georgia at 79.2% and Tennessee at 96.5%. One lingering issue: According to data from the Pew Charitable Trusts, the funds’ assumed rate of return (a weighted average across plans) is 7.75%, one of the five highest in the country. They’ve met the mark over the past decade, but any cut to that expectation would make the pensions look worse.

Steady Gains

Some state officials have complained about the performance. “We haven’t shortchanged ourselves like Illinois and other states ... so why are we in this predicament?” Arthur Orr, a Republican state senator, asked in the 2016 Governing article. He set out to form a pension committee that sought outside advice from places including Pew.

Bronner didn’t seem to take that well. He wrote newsletter articles that urged retirees to “speak up and let Sen. Orr and Rep. Greer hear your concerns” about measures he said “will hurt the safety and stability of your retirement.” He penned a headline that read: “Pew Got $9.7 Million, Judas Got 30 Pieces of Silver.” An article included from a weekly newspaper fawned that “the two men who’ve done the most to promote and advance the Alabama name, the Alabama brand are Bronner and Nick Saban.”

All this is to say that Bronner seems protective of his domain. That might explain why the retirement system has its own director of private placements, rather than outsourcing that investing. They appear ready to circle the wagons.

How they decided to go all-in on iPic is still a mystery, though. It’d be more understandable if the company had a theater in Montgomery or Mobile, but it doesn’t — and appeared closer to opening in Saudi Arabia than Alabama. For better or worse, their fates are now intertwined.

To contact the author of this story: Brian Chappatta at [email protected].

To contact the editor responsible for this story: Daniel Niemi at [email protected].

As of June 30. Also see page 20 of this filing.

© 2019 Bloomberg L.P.

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