On May 15, 2020 GNC Holdings – parent of General Nutrition Inc. – announced an agreement was reached with certain of its lenders regarding provisions in its loan agreements. Here are the key changes:
“GNC’s Tranche B-2 term loan, FILO term loan and revolving credit facility feature springing maturities that, prior to today’s amendments, were to become due on May 16, 2020 if certain conditions were not satisfied. Due to COVID-19 related impacts on its business, the Company expected it would not be able to reduce the amount outstanding under the convertible notes to less than $50 million by May 16, a requirement to avoid the springing maturity.
As a result of discussions with its lenders, GNC entered into amendments to its loan agreements to extend the springing maturity dates for the term loan facility, FILO credit facility and revolving credit facility until August 10, 2020, subject to certain conditions that, if not met, would cause the extended springing maturity date to move forward to June 15, 2020“.
There is only one BDC with exposure to the company – Harvest Capital (HCAP) – which appears to have $4.1mn invested at cost in the 2021 Term Loan that “sprang forward” to May 2020. As of IQ 2020 HCAP had discounted that position by (22%). This has caused the credit to be added to our underperformers list with an initial rating of CCR3. Notwithstanding the temporary truce between the company and its lenders featured here, we’re further downgrading General Nutrition to CCR 4. With economic pressures still underway; the fact that the borrower is largely a brick and mortar retailer and the short period given to solve its financial problems we cannot be optimistic. A loss seems more likely than full recovery, which is our standard for this rating level. There’s just over $0.4mn of investment income at risk.
We’ll revisit this credit in the summer to see where the situation stands. We fear that we might have to add the company at that time to our Weakest Links list of businesses where a payment default looks highly likely. For HCAP this is a smaller sized position and one which was only added – purchased at par – in the IQ 2019. Like everyone else the BDC could not have guessed that one year on Covid-19 would strike. However, putting new money into a retailer with 4,000 stores worldwide at a time when that sector’s apocalypse was well underway may be questionable for the Monday Morning Quarterbacks amongst us.