On May 15, 2020 Garden Fresh Restaurant Corp – which owns Souplantation – filed for Chapter 7. We had written about the restaurant operator’s troubles on May 9th, and it was clear at the time that the owners had little hope of being to able to keep the doors open in the Covid-19 era. Thus, the Chapter 7 liquidation decision.
This leaves the only BDC with $20mn of term debt exposure – Ares Capital (ARCC) – facing a certain realized loss once the company’s $50mn-$100mn in assets are sold and its 10,000 (!) creditors dealt with. As of March 2020, ARCC had the loan on non accrual and marked down (45%). The BDC is losing out on about $1.9mn of annual investment income on a loan that was faring fine till the virus changed everything. We’ll stick our neck out and guess that even a (45%) discount might not be enough here to reflect the final loss. We’re guessing (75%)-(100%)… We should have a clearer picture when ARCC reports IIQ 2020 results in the early summer.
This credit is notable for three reasons. First, this is one of the earliest bankruptcies of a company that was performing well before Covid-19 came along. Most of the other filings or restructurings we’ve memorialized in recent weeks are of companies that were already in deep trouble before Covid-19 sealed the deal. Second, the fact that liquidation has been chosen because of the ongoing change to the world as we knew it underscores the BDC Credit Reporter’s contention that this recession might see lower recoveries than might otherwise have been expected. That’s ominous news for lenders everywhere.
Finally – and as mentioned in our prior article – this represents a black mark from a credit underwriting standpoint for well regarded ARCC. Lending into the restaurant business and into an entity which had failed before (Garden Fresh filed Chapter 11 in 2018) was a credit bridge too far.
We will retain the company’s CCR 5 rating till liquidation is complete, which should be complete by the end of the year or earlier.