Le Tote Inc. is an apparel rental company that, in an unusual twist, purchased brick & mortar Lord & Taylor late in 2019. The idea then was to have both a virtual and a physical presence, and possibly end up with an initial public offering. Covid-19 has now laid those plans low and on April 1st, 2020 the company decided to close down all its physical locations. As we hear from trade reports, this included large layoffs throughout the company. Exact numbers are not known. As a result, we are adding Le Tote to the Underperformers List with a Corporate Credit Rating of 3.
The only BDCs with exposure are the TCG BDC funds (CGBD and CGBD II), which have exposure to the second lien added in 2019 to fund the Lord & Taylor acquisition; as well as Horizon Technology Finance (HRZN), which has a tiny ($63,000 at cost !) equity investment, reflecting Le Tote’s venture-background. At year-end 2019, the Carlyle CGBD/CGBD II exposure of $28mn (mostly held by the latter) was valued at par. The equity was valued at a nice premium. All of that is likely to change with sales dropping and with the about face in strategy in what was already – reportedly – a company not yet profitable.
Given that the Carlyle positions are in second lien and that anything with the word retail attached is worrisome at this time, we could be shortly downgrading Le Tote further. However, there is very little public information about the company’s financial condition, so we’ll wait to see what CGBD – and to a lesser extent – HRZN do in terms of valuation or disclosure when reporting IQ 2020 results.
We do question why Carlyle jumped at the opportunity just a few months ago to invest in the retail sector and in a strategy that – apparently – was highly controversial. We understand the many BDCs which have or had retail exposure that dated back to before the internet triggered the “apocalypse” that we’ve been living with for several years. It was hard to imagine even a few years ago that much of the way we shop – and with whom – would alter drastically. In this case, though, Carlyle added these debt positions – and in a junior position too – only in the IVQ 2019. Now $2.5mn of investment income is at risk of being interrupted or being completely lost.