Deluxe Entertainment: Files Pre-Packaged Chapter 11

On October 3, 2019 Deluxe Entertainment Group filed for a pre-packaged Chapter 11. As we had reported on September 4, 2019, the “debt burdened post-production company” had been considering a bankruptcy filing earlier but had chosen instead to undertake a debt for equity swap with its lenders out of the bankruptcy system.

A month later, Deluxe filed Chapter 11 anyway. As before, there will be debt for equity swap with its lenders which will reduce debt by half, and a further cash infusion by the new owners of $115mn. “All lenders will be offered the chance to participate“, say sources to Bloomberg. The decision to choose bankruptcy court after all was agreed to by both sides as a way to speed along the restructuring, which will see the lenders own 100% of the business. Chances are Deluxe won’t be under court protection for long. An October 24 confirmation hearing is being requested.

This means the day of reckoning is nigh for the three BDCs with exposure to the company: Cion Investment, Harvest Capital (HCAP) and TP Flexible Income Fund, with a combined $20.7mn of senior debt. Seems like half that amount will continue to be yield producing in some new loan and the rest written off or converted into equity. What we don’t know how much new capital will be forthcoming from these BDCs to fund the $115mn capital infusion.

For HCAP – the only public BDC in the group – their existing $4.7mn loan at cost, which was performing at June 30 2019 and valued at par, will end the September 30 period in non-performing status and -presumably – written down to some degree. We may have to wait till the end of the fourth quarter 2019 to ascertain HCAP’s total exposure, values and any realized loss.

Finally, we have to wonder why HCAP purchased the loan to Deluxe – as recently as March 4, 2019 – when some of the troubles facing the company must have been on the wall ? Was it a deliberate strategy or poor credit underwriting ? (The other two BDCs have been lenders for a much longer period).