United Sporting Companies: Files Chapter 11

On June 10, 2019, Sportco Holdings, the parent of United Sporting Companies – an intermediate holding entity with no assets of its own  – and all its subsidiaries Ellett Brothers, LLC,  (“Ellett”), and four of Ellett’s six wholly-owned subsidiaries: Evans Sports, Inc.,  ; Jerry’s Sports, Inc. , Outdoor Sports Headquarters, Inc ; and Simmons Gun, filed for Chapter 11 bankruptcy. The filing is attached.  From the report provided to the bankruptcy court, the financial difficulties of the group are of long standing, and both sales and EBITDA have declined precipitously. The owners – who include WellSpring Capital Partners IV and Prospect Capital (PSEC) – have been seeking a buyer since the beginning of the year, but Houlihan Lokey – who was in charge of the auction – found no buyers despite contacting 55 prospects. Liquidation of the companies assets seems to be the likeliest course of action in bankruptcy. 321 jobs are at risk of being lost.

From a BDC perspective, PSEC serves as both equity holder (21%) and a second lien lender. The BDC first became a lender in 2012 with a $100mn advance. Over the years, exposure reached $160mn, but was reduced by March 31 2019 to $127mn at cost. (We don’t know if the reduction in outstandings was due to repayments by the borrower, or the sharing of the debt with other PSEC entities or third parties). The debt has been on non accrual since IIQ 2017. The most recent value of the debt was $35.7mn. We expect that the entire second lien loan will be written down to zero, judging by the information in the filing. The company reports adjusted EBITDA of only $8mn, while there is an asset-based loan senior to PSEC’s debt with $23mn outstanding. In addition, the company reports $41mn in unsecured obligations outstanding which, arguably, rank pari passu with the second lien debt, which totals $250mn. There are also unpaid wages and ongoing payroll to contend with. A $30mn Debtor In Possession facility is being envisaged, but we’re not clear if PSEC will be providing that new debt capital in bankruptcy. If we are correct, the Realized Loss will amount to approx $0.35 a share and the incremental hit to net book value will be $0.10. There will be no impact on income as PSEC has been forgoing over $17mn in annual investment income for two years.  This is obviously a major credit reversal for PSEC, and another indirect casualty of the shake-out happening in retail, made worse by some managerial miscalculations (see pages 7-8 of the filing). Although the business – according to management’s admission in the filing – has faced “headwinds” since 2d015, PSEC did not materially write down its second lien position until the non accrual occurred in IIQ 2017. That discount has risen over the subsequent quarters from (41%) to (72%) most recently.