Borden Dairy: Bankruptcy Auction Completed

After much back and forth and a hard fought auction, bankrupt Borden Dairy was purchased by a joint venture consisting of Capitol Peak and “KKR & Co” according to the Wall Street Journal. (For the record, the WSJ in its article constantly refers to “KKR” as a lender to Borden, but – in fact – the debt is held by two BDCs which the famous investment manager co-manages with FS Investments: non-traded FS-KKR Capital II (soon to have the ticker FSKR) and publicly traded FS KKR Capital (FSK). As we’ve been discussing for months, these two BDCs, the management of which KKR took over from GSO Blackstone a few years ago, have $171mn in first lien debt outstanding at cost to Borden. We’ve read other publications, such as Bloomberg, all of which have not quite cottoned on that KKR’s involvement is through these BDCs which KKR & Co only co-manages and cannot even be called – as one journalist did – “KKR’s credit arm”.

Anyway, as far as we can tell, the two FS-KKR lenders are teaming up with Capitol Peak and will – in all likelihood – undertake some sort of “debt for equity” swap. More details to follow, so we won’t speculate about what the ultimate impact on FSK and FSKR might be. What seems sure is that the BDCs caught up in this bankruptcy will remain involved in the milk business for a long time yet and may yet be putting more capital to work.

Debt for equity swaps have been a way of life in the energy business for years, with unremarkable results for the former lenders as the industry has continued to struggle and is a mighty devourer of capital. Of course there have been debt for equity swaps in other industries as well and we expect the strategy to be the most popular one across the bankruptcy spectrum in 2020. That will leave many would-be buyers of distressed assets – currently raising funds as fast as they can – grinding their teeth. Lenders like KKR/FS Investments understandably believe “anything you can do, we can do as well” and are loath to walk away from troubled situations. So we expect a lot of debt turning into equity; more capital advanced in debt or equity and bold attempts to turn around businesses that have fallen on hard times. Like Borden. Whether that will prove a successful approach overall remains to be seen, but the BDC Credit Reporter will keep score best we can.

For the moment – short on gritty details and with the bankruptcy judge still needing to approve the winning bid – we are not changing any of our ratings. The debt remains rated CCR 5 – non-performing. Expect to be hearing more from us before long.