Sequential Brands: IQ 2019 Results

On May 10, 2019 publicly traded Sequential Brands (SQBG) published its 10-Q. Two days earlier, the company held its regular Conference Call and issued its earnings press release. We reviewed the results on May 29, which only reinforced our concerns about the future of the business. Without getting into all the details, Sequential has $600mn in debt outstanding and is generating $16.8mn in “Adjusted EBITDA” and $15.6mn in interest. Plus, performance is headed south, with first quarter result “below expectations”. The stock is virtually worthless, valued at $0.6670, close to its all-time low. Yet, the 4 BDCs with a sit up and notice $293mn in exposure at cost continue to value their debt at or close to par. Admittedly, there is $10mn of equity invested which has been virtually written off, following the stock price. That leaves, though, a whopping $283mn in debt – almost all nominally first lien. The BDCs with exposure – ranking from largest to lowest are FSIC II, FSIC III, FSK and AINV, all in the 2024 Term Loan. FSK has exposure of $63mn and AINV $13mn. Should the company default, both the income loss from a non accrual and the potential loss of capital in a restructuring or bankruptcy could be sizeable. We assume in a Worst Case, the BDC lenders would lose all their equity stake and half their debt outstanding, or over $150mn in total. Given the size of the exposure; the financial condition of the borrower and the possibly overly optimistic valuation we’re placing Sequential on our Daily Watch List to make sure we don’t miss any development.