In an unusual move, Serta Simmons Bedding publicly scolded S&P Global Ratings for recently downgrading the company to a CCC rating from CCC+. As this trade article explains, management’s contention is that the rating agency was making the move “based mostly on where our debt is trading in the markets”. The company went on to point to “continued trends of improved performance in our cash and EBITDA” as the reasons why S&P is wrong. Furthermore, the company contrasted the S&P approach with its arch rival Moody’s who were seen by Serta’s management as taking a more constructive approach. We don’t quite understand that last point as Moody’s downgraded Serta to Caa1 from B as far back as April.
For our part, we initiated coverage with a Corporate Credit Rating of 4 (Worry List) back on August 14, 2019. That’s only one level above non performing on our 5 point scale and indicates that we believed the chances of an eventual loss were greater than of full recovery. Initially, we added the company to the under-performing company list following the valuation of its debt by the only BDC with exposure – Barings BDC or BBDC – in the IQ 2019 results. At that point, the 2023 Term Loan in which BBDC was invested – which is institutionally traded – was discounted (19%). As of September 2019, that discount had increased to (33%). For what’s worth, as we write this, the discount has increased to (40%) in the loan market.
All the above only solidifies our concerns and CCR 4 rating where Serta is concerned, especially as the whole sector is going through a difficult period with competitors filing for bankruptcy, as we’ve covered on these pages.