Red Apple Stores: IIIQ 2019 Valuation

Canadian retailer Red Apple Stores has been under-performing since 2014, according to the BDC Credit Reporter’s way of marking these things. At September 30, 2019, the only BDC with exposure is BlackRock Capital (BKCC) with $29.7mn in second lien debt, preferred and equity. The last two are valued at zero and the debt at a (24%) discount, up from a (29%) discount in June.

However, when we checked on November 3, 2019 the bid-ask for the debt – which is institutionally traded and available on Advantage Data’s Middle Market Loans module, we found the discount unchanged from June, so we’re not sure why there was this modest increase in valuation between the second and third quarters.

We are continuing to rate Red Apple CCR 4 (Worry List). That means we believe the ultimate resolution is more likely to be a loss than full repayment. $2.3mn in annual investment income remains at risk of interruption and – given its junior nature – the entire investment could yet be lost. Once again BKCC provided no color on the company’s performance in its Conference Call and public information is sparse. (The last time BKCC provided any insights into this major portfolio company’s performance was in the IIIQ of 2017, when the BDC was “working with” management to cut marketing expenses to boost EBITDA). We don’t expect any immediate developments at Red Apple, but we could be surprised given the thin amount of public information and the BDC’s reticence to discuss.