Calling B. Riley Financial, Inc. (Nasdaq: RILY) a second-tier investment bank would be the highest compliment RILY ever received; we see it as a lender of last resort for the dregs of the public market. As financial conditions have contracted, RILY has not sobered up and cut its losses on failing investments, instead it has extended its distressed clients more capital so that it can pretend that better times are just around the corner.
Our research shows it 1) overleveraged to buy speculative assets during the financial mania of 2020-2021 and 2) lent money to companies that have degenerated into zombies. RILY’s total cash and investments, net of debt, fell by $950 million to -$350 million during 2022. Further, we believe RILY will record investment losses of up to ~$700 million in 2023, putting its dividend at risk, and potentially triggering a collapse of the firm.
We see RILY’s strategy to extend and pretend in many of its investments, but it is most evident in its treatment of Core Scientific, Inc. (CORZQ). The market reacted negatively in December when RILY’s offer to rescue CORZQ failed and it filed for bankruptcy, leaving RILY holding the bag on a $42 million loan.11 RILY released Q4 and FY 2023 guidance early, in part to reassure investors that this was an isolated event and its exposure to crypto was minimal.2 RILY couldn’t help itself and reversed course on January 31, more than doubling its exposure to crypto by offering CORZQ another $70 million in bankruptcy financing.3 Our analysis indicates that this new loan to CORZQ will work out just as badly as the last and end in default (again) before June 2023.4
CORZQ is not an isolated incident. We were able to reconstruct much of RILY’s corporate loan book, even though it is not directly disclosed by RILY,5 and found that many of the borrowers are in severe distress. We also noticed a pattern; RILY apparently does not admit mistakes or cut its losses but will throw good money after bad again and again to save face.
We are short B. Riley Financial, Inc.
Below are just a few examples of what we found in RILY’s loan portfolio:
o As of Q3 2022, XELA had $75 million in outstanding loans from RILY.6 XELA trades at $0.06 cents and has a delisting hearing on March 2. XELA failed to make interest payments on a loan to another creditor on January 17 and has 30 days grace to raise money to pay what it owes.7 Failure could trigger cross-default and acceleration, rapidly pushing the company into bankruptcy. o RILY has an $11 million loan with Greenidge Generation Holdings (GREE) that it restructured at the end of January after GREE missed two payments. As part of the deal, RILY will purchase $1 million worth of GREE shares at $0.75 per share in an offering underwritten by … RILY where it takes 15% of the offering proceeds.8 This could backfire, as just a month ago GREE was trading at only $0.30 cents. To us, GREE looks like it is in a slow-motion bankruptcy; its largest creditor took possession of most of its equipment to pay off a portion of its debt, and GREE needs to partition off and sell real property to partially repay RILY before the loan matures in June.9 o Another near-term negative catalyst for RILY is the loss of $175 million that will be wiped off RILY’s balance sheet if its SPAC BRPM 250 (BRIV) liquidates on May 11th, its deadline to identify a target.10 RILY is probably better off liquidating this SPAC than finding a target given its history with FAZE. RILY brought FAZE public in Q3 2022 via its own SPAC (it also provided a bridge loan and PIPE financing),11 and then watched as the company imploded, falling to $0.75 cents by the end of January 2023, driving down the value of RILY’s 12 million shares in this company to less than $10 million, a loss of over 90%.12
The losses from GREE, XELA, and BRIV are the most imminent problems facing RILY, however we see plenty more trouble ahead for RILY:
o RILY disclosed that it has assumed a massive risk and guaranteed up to $110 million in debt for a related party, Babcock & Wilcox (BW), which appears to be hurtling towards bankruptcy itself.13 BW has a cash ratio of 0.15, a quick ratio of 0.61, negative equity, negative cash flow and an Altman Z-Score of -0.93, which is indicative of severe financial distress.14 Its long-term debt stands at $334 million and at the start of Q4 it adjusted