TOMS Shoes: Downgraded by S&P

On June 18, 2019, the famous TOMS Shoes LLC received a downgrade from S&P Global Ratings. The first sentence of the press release tells you enough: “[the company’s] turnaround effort is taking longer than expected and its adjusted leverage remains elevated at around 10x, which will make it difficult for the company to address its upcoming term loan maturity in 2020 without undertaking a subpar exchange”. If that’s not enough to worry you, then there’s this sentence from further on in S&P’s report:“The negative outlook also incorporates TOMS’ continued sales declines, eroding liquidity, and its fixed-charge coverage ratio, which is at or below covenant levels, due to the challenging retail environment and the company’s continued weak operating performance”.The ratings were dropped to CCC from CCC+ for both the company and the first lien debt. The $9.3mn in aggregate BDC exposure (Main Street and HMS Income) is in the 2020 first lien debt and was already written down by (18%) in the last couple of quarters, even though income is still current. None of this is any surprise to the BDC Credit Reporter, which has had TOMS on its under-performing list since late 2015 and on our Worry List for about the same time. Our current Credit Corporate Credit Rating is 4, just one notch above non performing. Bankruptcy or a debt for equity swap seems almost inevitable despite the best efforts of PE owner Bain Capital to effect a turnaround. The BDC lenders involved seem at risk of absorbing $0.750mn of annualized investment income interruption for some period, and a Realized Loss at some point in the sub $5mn range. This may become yet another lender-owned company. Still, the amount of income and book value at risk are relatively modest for MAIN and its sister BDC.