The RealReal Earnings: Restructuring Lessens Risk of Debt Default or a Dilutive Equity Raise

The headline from no-moat The RealReal's fourth-quarter earnings report is that the firm is not likely to go bankrupt until at least until 2028 after it restructured $145.8 million of its outstanding 2025 convertible notes (roughly 86% of that series). While the restructured notes carry an eye-popping 13% interest rate (8.75% cash plus 4.25% paid in kind), the restructuring reduces The RealReal's total debt load by $17 million and pushes repayment on that series out until 2029. At that point, we forecast the firm will be free cash flow positive, and we believe that capital markets may prove more accommodative. The deal, while punitive, is much less dilutive than our previous expectation for roughly 3 times dilution at unfavorable equity prices. The net effect is an 80% increase in our intrinsic valuation to $2.08 from $1.21. While opening prices for March 1 trading are extremely uncertain, shares traded close to our revised valuation after a roughly 20% jump in after-hours trading on Feb. 29.