Back on May 3, 2020, the BDC Reporter downgraded Sur La Table to CCR 4 on reports of an imminent Chapter 11. As we write this on May 9, 2020 that has not yet come to pass. In the interim, though, both BDC lenders to the company – and both in the 2022 Term Loan – have reported IQ 2020 results. Both are carrying Sur La Table as non-accruing. BlackRock Capital (BKCC) has discounted the debt by (34%) and Capitala Finance (CPTA) by (41%). As a result, we have downgraded the company’s rating to non-performing, or CCR 5. We had placed the company on our “Weakest Links” list, projecting that a non-accrual was likely, an issue which is now moot.
The income lost on the $35mn invested at cost by the BDCs involved is ($3.5mn). BTW, BKCC has $21mn and CPTA the rest. We expect the final realized loss – barring a miracle – could be coming in the second or third quarter 2020 and might be as high as 50% of cost or ($17.5mn). That would mean slightly greater write-downs by both BDCs to book value. However, our loss projection is just a guesstimate.
With the benefit of hindsight, one has to question the wisdom of lending to a bricks & mortar retailer. In defense of both BKCC and CPTA, the initial loan was entered into years ago: 2011 and late 2016 respectively. One might argue that the retail apocalypse had not yet begun. Moreover, outstandings reduced from $45mn to the current level thanks to a repayment in mid-2019, so things could be worse. At year end 2019 the debt had been written down (4%), but was still carried as performing, even though we had some concerns given the sector and managerial changes.
The fact that we’ve gone from CCR2 to CCR5 in one quarter can be laid at the door of Covid-19. So far, though, neither the company’s PE sponsor nor any government program has been capable of supporting the firm, underscoring the limitations of both in these extreme conditions. We wouldn’t be surprised to see CPTA and BKCC end up as as owners in an eventual debt for equity swap, but that may require new capital to restart operations. Historically, BDCs taking over retailers has not worked out very well so we’ll reserve judgement – and any more commentary – till we learn more about the future plans of Sur La Table.