Hollander Sleep Products: Chapter 11 Plan To Progress

Bedding manufacturer Hollander Sleep Products is under bankruptcy court protection since May, but seeking to get its plan approved and to return to a normal, but less leveraged status. On July 22, 2019 the company “sought a court order … approving a settlement with unsecured creditors that revises its restructuring support agreement and marks an important step toward the maker of bedding products emerging from Chapter 11 bankruptcy”.

There are two sister BDCs with $34mn of exposure to Hollander: PennantPark Floating Rate (PFLT) and PennantPark Investment (PNNT). Most of that exposure is in pre-petition debt and on non accrual. (There is also $3.7mn of DIP financing paying interest currently). At June 2019, the Pennants had discounted the old debt by (53%), up from (13%) after the debt first became non performing. That suggests realized losses – when Chapter 11 exit does likely occur in the IVQ – will exceed ($20mn) and leave the two BDCs with over $2.0mn a year in lower investment income. What the new capital structure of Hollander will look like; whether there will be a debt for equity swap and what the role of the two BDCs will be we’ll leave for a future post as the dust settles.

Arthur Penn – CEO of both BDCs- did address the subject of Hollander on the latest PNNT Conference Call on August 8, 2019. He made clear PNNT/PFLT were not leading the debt discussions, He said there were “stalking horse” bids, but did not seem confident what the ultimate value of the company might be in the marketplace. That leaves open the possibility that the value at June 30, 2019 may yet materially drop further, making a bad situation worse for both PFLT and PPNT.