CSSEN - Chicken Soup: Notes Vs. Preferreds - Evaluating The Better Income Choice

2023-06-21 07:00:00 ET

Summary

• Chicken Soup for the Soul Entertainment's 9.5% NT 25 and 9.75% PFD SER A will be both callable in days, but it is unclear which, if either, will be called.
• The Preferred Stock has an income advantage over the Note, with a 25bps higher coupon and eligibility for a 15% tax rate.
• Investors in both securities are concerned about receiving periodic payments and the redemption of their investments on time.
• For investors with a taste for risk, I believe the Notes have held up better and are the "safer" choice.  CSSEN trades near a 12% YTC.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

Last year, I increased my holdings in the Chicken Soup for the Soul Entertainment, Inc. 9.5% NT 25 ( CSSEN ), as the speculation was the Notes would be called when it became eligible. That didn’t happen. This summer, the Chicken Soup for the Soul Entertainment, Inc. 9.75% PFD SER A ( CSSEP ) can be called. Which, if either, will actually be called will be discussed after each issue is reviewed. With Chicken Soup for the Soul Entertainment's ( CSSE ) current tight finances (and that is an optimistic view), I do not see either being Called in the near future.

Understanding the CSSE Notes

With the preferred becoming callable on 6/27/23, neither provides any call protection. That said, CSSE financial situation does not appear strong enough for that to be a concern at this time. CSSE's ability to redeem is covered later.

Understanding the CSSE Preferred Stock

With CSSEP being eligible for the 15% tax rate and 25bps higher coupon, the Preferred as an income advantage over the Note. If not called and CSSE stays viable, investors benefit from owning the Preferred over the Note which matures in 2025.

Understanding Chicken Soup for the Soul Entertainment

From the Investors Relations webpage:

Chicken Soup for the Soul Entertainment provides premium content to value-conscious consumers. The company is one of the largest advertising-supported video-on-demand (AVOD) companies in the US, with three flagship AVOD streaming services: Redbox, Crackle, and Chicken Soup for the Soul. In addition, the company operates Redbox Free Live TV, a free ad-supported streaming television service ((FAST)), with nearly 180 FAST channels as well as a transaction video on demand (TVOD) service, and a network of approximately 31,000 kiosks across the US for DVD rentals. To provide original and exclusive content to its viewers, the company creates, acquires, and distributes films and TV series through its Screen Media and Chicken Soup for the Soul TV Group subsidiaries. Chicken Soup for the Soul Entertainment is a subsidiary of Chicken Soup for the Soul, LLC, which publishes the famous book series and produces super-premium pet food under the Chicken Soup for the Soul brand name.

Source: ir.cssentertainment.com

Their competition are some very large companies like Netflix, Paramount, and Disney just to name a few. In a May investor presentation, CSSE listed the following as positives that they see.

Last year, they took over the failing Redbox franchise which makes YOY financial comparisons somewhat irrelevant in my view. Investors in CSSEP and especially CSSEN, which matures on 7/31/2025, want to know several things:

• Am I going to get my periodic payments?
• For CSSEN, will my Notes be redeemed on time?
• For CSSEP, will there be enough assets to cover redemption if CSSE files for bankruptcy?

The financial statements help give investors a clue as to where they stand at this point in time, but 2-3 years is a long time for entertainment companies in this every evolving marketplace.

The most recent capital structure (5/23) is as follows.

The major HPS loan come due after the Notes mature so it doesn't affect cash needs for CSSEN maturing, though the smaller HPS revolving credit will need to be renewed before that date. In May of 2022, CSSE issued another $10.4m of the Notes at $24.85. To me, at least at that time, investors were not demanding a higher yield to purchase the notes: a good sign. In case of bankruptcy, while the Notes rank the same as the other debt, they have no claim on any corporate assets, which lowers their actual ranking. The Notes do rank above the Preferred and then the Common shareholders.

So the real question becomes, what assets are currently available to pay off all the debt owed at this time?

It has been 50 years since my Accounting classes, but here are the assets I see available as of 3/31/23:

Easy access:

• Cash: $5.467m
• Accounts Receivable: $149.938m
• Prepaid expenses: $11.758m

Liquidation or sale required:

• Right-of-use assets: $15.430m
• Content assets: $115.037m
• Other assets: $27.798m

The non-debt liabilities come to $345.169m. I assume the non-debt liabilities fall behind the debt payments, but that might not be the case for all, as some might have claim to assets held. If so, that means there is $167m to repay $500 in debt; another $158m with possible asset sales. On the plus side, $335 comes due after CSSN matures and only about $50m is needed for that event. If CSSE can recover most of the value of the intangible assets, that would cover all the debt obligations. The identifiable intangible assets included customer relationships, technology and trade names and are being amortized on a straight-line basis ranging from 3 years to 15 years.

Another important financial statement is the Cash Flow report.

In the past year, CSSE has burned thru $66m in cash. CSSE was able to offset $42m via financing transactions, including issuing $62m in new debt.

Recent insider activity includes:

• A Director purchased 26,690 shares of CSSP @$15.53 in June. The same Director sold 17,900 units of a Promissory Note days before.
• The same Directory added 10,625 common stock shares in April, bringing their total to 275,493.

Portfolio strategy

I will start by comparing the two CSSE investments.

The Total Return chart shows investors believe in the Notes more than the Preferred.

To me, this is very logical for the following reasons:

• CSSEN ranks higher in the hierarchy if bankruptcy occurs.
• While CSSEP payments can be skipped, CSSEN's cannot without a default.
• CSSEN has a maturity date, which to me increases the odds of getting the face value back.

For each of the above reasons, I own CSSEN, not CSSEP or CSSE.

Final thoughts

If CSSE files for bankruptcy, all bets are off as to CSSEN being made whole, let alone the CSSEP owners. It appears CSSE needs a "sugar daddy" to come along and take them over, pay off the Noted and Preferred and put the resources to make these assets more than a small niche in the expanding online video universe.

For those willing to take the risk, the Notes offer more protection as I see it. As of this writing, the YTC on CSSEN is 12%. Volume is low and Bid/Ask spreads of $.50 are common so short-term trading not suggested. Enter as a Limit trade when placing an order and expect having to accept the other sides offer price.

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