KLO Acquisition: Laying Off Employees

A news report on October 29, 2019 indicated Hemisphere Design Works (the new name of KLO Acquisition, also known as KLO Intermediate Acquisition or KLO) is laying off employees and shutting down operations in Muskegon,MI.

Phones were turned off at the company’s headquarters in downtown Muskegon and doors were locked at the Muskegon Lake-front headquarters.

According to a notice of the facility’s closing obtained by Muskegon Chronicle/MLive.com from a Hemisphere employee, the company plans to close its operations at 1790 and 1880 Sun Dolphin Drive in Muskegon, but did not specify when the closure would become permanent.

There was more damning information in the article which suggests that the manufacturer’s problems involve more than work force reduction, but might result in Chapter 11 or Chapter 7 liquidation.

 The company admitted in a letter to experiencing “challenging business circumstances” and that they had been working to secure additional funding sources, but had failed.

Although we anticipated receiving additional capital as we worked through these circumstances, we have now learned that the term lender will not provide additional funding,” the letter reads.

One employee said workers were told Dicks Sporting Goods had canceled a major contract for kayaks, leading to financial troubles and a bank taking control of the company. There have been other layoffs and work slow-downs leading up to Tuesday’s announcement, he said.

There are two BDCs with exposure, which totals $16.1mn, both in the 2022 Term Loan and which has been on non-accrual at the end of the IIQ 2019. Apollo Investment (AINV) has a $5mn position, with the rest held by non-listed Cion Investment. The debt is priced at LIBOR + 775 bps. and valued at a (14%) discount as of mid-year. More recently, the debt – which is institutionally traded – was valued a little lower but we don’t know if that reflects real market value. From what we’ve learned to date, including this damning expose, things could go from bad to worse. Here’s an extract to give you a sense:

After the company moved employees into a facility behind Pizza Ranch in East Muskegon, Kolberg [a former employee] said there were significant issues, from little heat to plumbing problems (things got so bad that Kolberg said employees would often use the portable toilet outside their office).

People actually started to go to the bathroom on the floor in the building,” Kolberg said. “After that happened, human resources came over and said one day a month, each person would have to clean the bathroom. When someone said they wouldn’t, she [the human resources employee] said, ‘You will or there will be disciplinary action.

We are adding the company – the world’s largest kayak manufacturer – to our Bankruptcy Imminent List (our version of Loans Of Concern that the rating groups publish).