On May 15, 2020 Sequential Brands reported IQ 2020 results. More importantly, the company reported very tight liquidity even after drawing on its Revolver: just $14mn. Furthermore, in a press release, the company admitted to being in negotiations with its lenders to avoid any prospective loan defaults and raised doubt about its status as a “going concern”. The stock price – not very material to start with – dropped (11%) to $0.19.
The BDC Reporter has rated the company CCR 4 for some time. The chances, though, of a bankruptcy or recapitalization have greatly increased thanks to Covid-19, as reflected in these latest developments. This is what we call a Major BDC borrower (over $100mn), with $292mn invested at cost as of December 31, 2019. (Not all the IQ 2020 outstandings have been reported). The 3 BDCs involved are publicly traded Apollo Investment (AINV); FS-KKR Capital (FSK) and sister non-traded fund FSIC II. Most recently FSK valued its position in the 2024 Term Loan at just a (2%) discount. However, the $10mn in equity owned by two FS-KKR BDCs is valued at next to nothing, as the stock price mentioned above suggests.
If Sequential does default – as we’ve mentioned in earlier articles – the biggest immediate impact will be the receipt of the $30mn of investment income the three BDCs have been used to collecting. Whether there will be any realized loss from the debt held continues to be questionable, but the equity will certainly be written off. Most impacted of all will be FS Investment II, which holds 75% of the BDC exposure.
Of the 6 Major BDC borrowers on the BDC Reporter’s Weakest Links list, Sequential is by far the largest. Should a bankruptcy/restructuring occurs it will be the biggest one since the Covid-19 crisis began from a BDC lender perspective. Like so many other names on that Watch List, Sequential was already deeply troubled before the crisis. Current conditions make an unhappy outcome – and possibly a much bigger loss than the BDCs have been planning for in their valuations – almost certain. We expect to be reporting again shortly.
May 20, 2020 Update: From another news report we have learned that “The company closed the first quarter with $13.3 million of cash and $460.7 million of debt net of cash. As of March 31, availability under its revolver was $7 million, which the company fully borrowed subsequent to the end of the quarter“. The above underscores that Sequential Brands is effectively out of cash and some sort of action will be necessary.