AVF Parent: Liquidating Business

Ouch ! This one is going to hurt. Art Van Furniture (aka AVF Parent in Advantage Data), the largest furniture retailer in the Midwest, has begun to liquidate the inventory at all its company owned stores. “Despite our best efforts to remain open, the company’s brands and operating performance have been hit hard by a challenging retail environment,” the company spokeswoman Diane Charles said in a statement. According to news reports there is still a chance the company will find a buyer, but the odds don’t look great. Not helping the matter is that the CEO has just resigned. A bankruptcy filing is imminent. This could end up Chapter 7 rather than Chapter 11.

Chances are the $169mn invested in the first lien debt of the company by 4 related FS/ KKR Advisor LLC BDCs is going to take a big hit. At December 2019, the only BDC lender to have reported so far – publicly traded FS KKR Capital (FSK) – has already discounted its $55mn at cost to $18mn. Even that ($37mn) write-down may not be As Bad As It Gets. If the company ends up liquidating completely, net proceeds may be even lower. Have you ever tried to sell furniture in a hurry in the midst of a health crisis ? The Term Loan in which the BDCS are invested sits behind an $85mn asset-based Revolver, which may sweep up all proceeds.

Let’s tot up the damage. Total investment income lost already thanks to the company being on non-accrual since the IIIQ 2019 on debt charged at LIBOR + 725 bps: about ($15mn) per annum. The unrealized losses in aggregate will be ($115mn). As we’ve discussed this will translate into an equal or greater realized loss. At worst, we wouldn’t be surprised if ($150mn) was written off. Or even the full ($169)mn…

For the FS KKR organization this has to be a major reverse. Still, the initial investment in a furniture retailer – almost a code word for risk amongst old time lenders like the BDC Credit Reporter – dates back to IQ 2017 when GSO Blackstone was in charge of underwriting. The initial exposure was $130mn., all in the same 2024 Term Loan that’s in trouble today. The first crack in the valuation didn’t occur till IIQ 2018 by which time $174mn was at risk. Still, the valuation discount did not exceed our hurdle of (10%) till the IIQ 2019. Two quarters later, Art Van Furniture was on non accrual and now in liquidation.