School Specialty, Inc.: Debt For Equity Swap Negotiations Underway

On April 6, 2020 , publicly traded School Specialty Inc. (ticker: SCOO) reported results for the year ended 2019. Sales were down, big losses to the bottom line were recorded for yet another reason. And that was before Covid-19 hit its school supplies business like a ton of bricks. Now the company is throwing up its hands and negotiating a “debt for equity” swap with its lenders, according to the company’s CEO. Here is what was revealed:

With the additional complexities of the COVID-19 situation, our process to address our capital structure is exclusively focused on discussions with our current senior secured lenders.  We have recently executed amendments and forbearance extensions that enable those discussions to continue.  While we do not expect those discussions to result in a transaction that provides meaningful value to our shareholders, we do currently expect we will arrive a transaction that will improve our liquidity position and allow our Company to continue as a going concern.”

The only BDC with exposure at 12/31/2019 was TCW Direct Lending, with $33.8mn invested almost completely in the company’s only senior debt which matures late in 2020 (except for a now small asset-based loan). At year’s end that was valued at a small discount and we carried the company as performing with a Corporate Credit Rating of 2.

All of that has now changed. We’re downgrading School Specialty to CCR 4, and shortly to CCR 5. Only a forbearance agreement is keeping the debt from being non-performing. Remarkably, according to Advantage Data market records, the 2020 term debt is trading at 80 cents on the dollar. A glance at the company’s 10-K makes that questionable, so a bigger loss might be coming once all the dust has settled and the company is restructured. Or liquidated. With school in so many places postponed till the summer or autumn, the company may not be able to recover in any format.

This threatens to be a big hit to income for TCW, especially as some of the debt was priced towards the end at 16.75%. If we’ve calculated right, the BDC might have been booking $4.8mn of annual investment income from this position. In any case, we’ll swivel back if and when a final deal is agreed between the company and its lenders.