Fairway Group Acquisition: Company Up For Sale

The Wall Street Journal reported that “quintessential New York grocer” Fairway Market is up for sale and potential bidders are already squeezing the melons.

That might or might not be good news for the lenders to the company – who are also owners following a 2016 debt for equity swap as part of a bankruptcy. There has also been a 2018 debt restructuring which Moody’s – never once to mince words – called ” a distressed exchange” and predicted that a new restructuring would be needed in 12-18 months. It’s taken less time than that for Fairway – best by competition from Whole Foods and others – to be back in hot water.

If a buyer does come along and pay full price, the two BDCs with exposure are sister firms FS Investment II and FS Investment III, owned by FS-KKR. According to Advantage Data, the two BDCs have multiple first and second lien loans to the company and equity besides for a total of $30mn. Some of that debt is already on non accrual or accruing only Pay-In-Kind income.

This exposure began back in 2014 with $10mn in advances, tripled in 2016 and has been nothing but trouble first for GSO Blackstone and now KKR. The second lien and equity has been written to zero and some of the original first lien debt has been discounted (90%) as of June 2019. Total FMV is close to $16mn.

Just as likely as a deep pocketed buyer is a Chapter 22 situation, i.e. another bankruptcy. We would speculate that the existing owner/lender group is unwilling to risk any new capital in the business. Should that occur, the two BDCs involved are in danger of booking some mid-sized Realized Losses and a enough-to-be-noticed amount of investment income. A failure here would – once again – place a spotlight on the controversial (at least in the eyes of the BDC Credit Reporter) practice of BDCs and other lenders turning into distressed asset owners. However, before we get all judgmental, let’s see if the sales process turns out to be a godsend, and allows the two BDCs involved to get out with little or no damage.