By recent large company bankruptcy standards, Borden Dairy has remained under court protection for longer than most. That’s because there was no consensus between the owners and the lenders when the dairy giant first elected Chapter 11, as we discussed at the time. Then there were disputes about how to apply liquidity and plans by bondholders to merge Borden with that other bankrupt dairy name: Dean Foods. The latest news is that the judge in the case has agreed that the company may sell its assets at an auction in June if no other viable restructuring plan does not take precedence.
We have used the opportunity to update the latest numbers from the IQ 2020 results about BDC exposure. Where there were 4 BDCs involved now there are only two because FS Investment II acquired FS Investment III and FS Investment IV. Now there’s $170.5mn at cost of first lien debt exposure divided up between the afore mentioned non-traded FS Investment II and its public sister BDC FS KKR Capital (FSK), split $103.1mn and $67.4mn. That’s much unchanged since the bankruptcy began. The FMV, though, has dropped from $152.5mn before the bankruptcy to $75.7mn. Even since the IVQ 2019 results, when the company was already in Chapter 11, the debt has dropped sharply in value, from $90.5mn. We can’t determine if a further discount is likely, but current market conditions can’t help.
What does seem probable is that some sort of resolution is coming. That means a realized loss is likely to be booked in the IIIQ 2020 which could be as high as ($100-$120mn). (BTW, this is far and away the biggest BDC exposure to a sector that has been in secular decline for years, but we have found two other underperformers in our database with dairy credentials. More on those in future posts).
We wonder if the FS-KKR organization is really interested in becoming an owner of this business in this sector by involving itself in a standard “debt for equity swap“. That will almost certainly require deploying new capital at a time when BDC liquidity is constrained and remaining involved in the milk business with its Byzantine complications for many more years to come. More likely – in our purely speculative view – is that the BDC lenders will let some third party acquire Borden’s assets and take their credit loss medicine and walk away with whatever proceeds are available. We will find out shortly.
Borden remains rated CCR 5 or non performing. Given that BDC exposure is over $100mn this is a “Major” company by the BDC Credit Reporter’s standards, which just means that we keep special tabs on what’s going o because the financial impact is so high. FYI: At the moment Borden ranks tenth highest – on a cost basis – of the 45 “Major” underperforming BDC-financed companies in our database.