School Specialty, Inc: To Explore Strategic Alternatives

Publicly traded School Specialty Inc. announced on October 9, 2019 “has commenced a formal process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value”. Previously, the company had announced the hiring of a financial adviser to assist with re-jigging its financial structure. Now the company aims to review “all options”.

We reviewed the latest quarterly financials, which showed the company generating just $10mn of EBITDA and a net income loss of ($6mn). Debt, though, was very high at close to $200mn, and trade payables are growing as sales are dropping. Trouble clearly lies ahead, and the stock price has dropped to $2.50, down from a high of $17.10 within the last 52 weeks.

This must be worrisome news for the only BDC lender: non-listed TCW Direct Lending, which has a material exposure of $43.1mn, all in the publicly traded 2022 Term Loan, which itself is structurally subordinated to an asset-based loan. At June 2019, TCW had discounted its position by as much as (8%). The current market value of the debt is slightly lower at time of writing. The possibility of an even greater write-down – and some sort of write-off – is growing by the day.

We are downgrading the debt from “performing” – or CCR 2 in our 5 point rating system – to CCR 3. Given the high interest rate being charged (11.4%), the potential loss of income could be high: close to $5.0mn. We get the impression that School Specialty – only now arriving on our under-performer list – may be here for awhile.