Juul Labs - Bankruptcy Filing Possible

10/5/2022: Bloomberg reports, "according to people with knowledge" that Juul Labs - the vaping giant - is considering a Chapter 11 filing and is having "informal talks" (whatever that means - over coffee at the local Starbucks ?) with lenders about a potential debtor-in-possession financing. The article suggests nothing is definite and other options are being considered, but this has all the hallmarks of a company that needs bankruptcy protection, given the mountain of lawsuits which Juul has to contend with.

There are two BDCs with exposure to Juul. Both are publicly traded and both are BlackRock managed: Blackrock Capital Investment (BKCC) and BlackRock TCP Capital (TCPC). Total exposure at cost is $38.8mn and - as of the IIQ 2022 - the valuation given was $33.9mn. The BDCs are invested in the senior debt of the company, which nominally matures in August 2023.

Till recently - and despite the many negative headlines about Juul and its battles with regulators, the BDCs involved - which initiated their relationship in the IIIQ 2019 - valued the debt at par. Only in the IIQ 2022 valuation was a (12%) discount applied for the first. For our part, we've had Juul on our underperformers list since early 2020, when we first heard of the Federal Trade Commission's beef with the company and its then parent Altria. The recent valuation downgrade suggested something negative was happening.

We have downgraded Juul from  CCR 3 to CCR 4 (which means we expect a realized loss is more likely than full repayment) on our 5 point scale. Obviously, we may have to take the company down another notch shortly. There's usually only a short time between these unattributed stories in a financial publication and the actual trip to the courthouse. At the moment - and subject to change as more details emerge - we are assuming the BDCs might face an ultimate realized loss equal to 0%-25% of their exposure. In the short run, though, BKCC and TCPC might have to contend with the interruption of ($3.3mn) in annual investment income from the loans if a filing occurs.

Expect to hear more soon about this high profile company.