B. Riley Suspends Dividend, Warns of Loss on FRG Investment #NewsUnitedStates

(Bloomberg) — B. Riley Financial Inc. suspended its dividend and warned of new losses as the firm wrote down a portion of its stake in Franchise Group Inc., a troubled US retail business. The company’s shares lost about half their value in New York trading.

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The Los Angeles-based firm expects losses for the quarter ended June 30 to be between $435 million and $475 million, according to a statement Monday. The loss is fueled by a markdown of up to $370 million on B. Riley’s investment in Franchise Group, or FRG, an owner of retail chains where the bank is one of the biggest shareholders.

B. Riley and founder Bryant Riley have also received subpoenas from the Securities and Exchange Commission regarding their ties to Brian Kahn, a businessman who the firm helped to take FRG private last year, Riley said in a subsequent phone call with investors.

The company’s shares plunged 50% in New York, spurring a trading halt, and changed hands for $8.55 as of 9:42 a.m. in New York after trading resumed. The stock had already fallen more than 80% since the end of 2021 amid concerns about its investments.

B. Riley helped Kahn buy out FRG in a transaction that saw the investment firm take a 31% stake. The deal has since been troubled by allegations about Kahn’s role in the collapse of a hedge fund named Prophecy Asset Management.

“The reports concerning Brian Kahn, FRG’s former CEO, and his alleged misconduct at Prophecy have continued to create additional challenges for this investment, despite the fact that these allegations are unrelated to FRG or B. Riley,” Bryant Riley said in the statement. “We believe these developments have materially impacted the execution of FRG’s business strategy, including its ability to divest or otherwise monetize certain assets.”

Short sellers have been relentlessly betting against B. Riley for the past year over soured acquisitions and its dealings with FRG and Kahn. Kahn has categorically denied any wrongdoing and said he was among those who lost money when Prophecy collapsed.

B. Riley faces a widening US investigation into whether it gave investors an accurate picture of its financial health and its ties to Kahn, Bloomberg News reported Monday. Bryant Riley told investors on Monday the firm is confident that the SEC will conclude “that we had no involvement with or knowledge of any alleged misconduct concerning Brian Kahn or his affiliates.”

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B. Riley plans to file a notice with the US Securities and Exchange Commission that it will be delayed in publishing its quarterly 10-Q filing for the period, according to the statement. This will be the third time this year that the bank is unable to file its regulatory reports on time, after missing deadlines for filing both its annual report and its quarterly 10-Q filing for the first three months of the year.

Scrutiny of FRG’s finances has accelerated since the July 24 bankruptcy of Conn’s Inc., a furniture retailer to which it had financial ties. S&P Global Inc. downgraded its rating on the company that same day to CCC+, some seven levels into junk territory, and described its results as “persistently weak.”

Troubled Credit

“FRG’s capital structure appears to be unsustainable with elevated risk of a covenant breach absent an equity cure or amendment given the Conn’s bankruptcy,” S&P analysts wrote.

The FRG deal was funded in part by a $600 million loan that Nomura Holdings Inc. arranged for B. Riley. The Tokyo-based bank committed $240 million to the debt itself, more than any other lender, Bloomberg News has previously reported.

B. Riley put up about $1.5 billion of various assets as collateral for the Nomura debt. That included about $220 million of FRG shares and another $200 million in the form of a loan to Kahn that was itself secured by more FRG stock.

Bloomberg reported in January that a team of external advisers had encouraged Nomura to write down the value of its loan to B. Riley, citing allegations against Kahn and warning that the collateral for the debt could be tainted by fraud. Officials at the Japanese bank decided not to take action at that time.

It’s unclear what action Nomura has taken regarding the value of its loan to B. Riley. A spokesperson for the bank didn’t immediately comment.

–With assistance from Jenny Surane.

(Updates with share price performance, rating firm actions, starting in the first paragraph.)

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