Reuters has a scoop: TOMS Shoes LLC will be filing for a pre-packaged bankruptcy at any moment which involves a debt-for-equity swap; the injection of new capital and a change of ownership. Apparently, the lenders to the company will be providing “debt relief” – how much is not known – and are throwing in $35mn to help the business function. Bain Capital and founder Blake Mycoskie will be losing their respective 50% equity interests in TOMS.
None of this is a great surprise for the BDC Credit Reporter. We’ve been warning about TOMS since May 2019 and have carried the company as under-performing for the last 4 years ! In our most recent post in June – shortly after S&P downgraded the company’s credit rating , we said the following: “Our current Credit Corporate Credit Rating is 4, just one notch above non performing. Bankruptcy or a debt for equity swap seems almost inevitable despite the best efforts of PE owner Bain Capital to effect a turnaround“
However, as we’ve noted before, BDC exposure to the once highly popular shoe brand is relatively modest. As of September 2019, total exposure at cost – all in the upcoming 2020 Term Loan that TOMS did not have the resources to refinance – was $9.3mn and had been written down by (34%). For what it’s worth, that same debt is trading currently at a (30%) discount. Maybe holders expect some of the debt to get repaid or are estimating the value of what equity will be received. In any case the BDCs involved – Main Street Capital (MAIN) and non-listed HMS Income are likely to lose some or all the investment income on the loan (priced at LIBOR + 550 bps) and have to book some sort of Realized Loss this quarter or next. Rough guess: ($3mn-$5mn). We don’t expect that TOMS will be staying in bankruptcy for long, and the current lenders may soon be equity owners with an indeterminable timetable for repayment.
Not to be short of Christmas cheer, even after the pre-packaged bankruptcy, TOMS will continue to face challenges in a negative retail environment and after a considerable period of declining sales. Capital can only take a business so far, and the new owners will have to show that the TOMS business model makes sense. If the BDC lenders end up still holding debt and/or equity in the new TOMS, we’re likely to keep the company on the Under Performers list. For the moment, tipped off by Reuters, we’re moving our Corporate Credit Rating from 4 (Worry List) to 5 (Non Performing). When we learn more about the final disposition of the restructuring, we’ll have more to add.