The last time we wrote about outside sports retailer Pure Fishing was in response to a downgrade by Moody’s to speculative grade. Now S&P has joined in, dropping the company’s credit rating to CCC+, from B-, according to an article. There’s only a six week gap between these ratings so there’s not much new bad news. However, we did focus principally on liquidity matters, which included this comment by S&P: “…we expect working capital to be a use of liquidity in 2020, as slowed inventory turns coupled with delayed collections result in a net use of the company’s cash and reliance in 2020 on its $125 million ABL revolver, which had a $100.6 million balance at the end of March 2020. We expect the company to continue to generate negative operating cash flow through the end of 2020“.
We already had Pure Fishing in “speculative” territory, i.e. rated CCR 4 on our 5 point system. No change there. We also continue to have Pure Fishing on our Weakest Links list, expecting a default or restructuring to occur in the short term. That’s been a bridge too far till now, as the S&P review seems to suggest the company may yet avoid that fate. We tend to be more conservative, especially as BDC exposure here is in the more vulnerable second lien level.
Since we last wrote IQ 2020 results have been published. The two BDC lenders exposure at cost ($125.8mn) remain Major, but unchanged. Not surprisingly, the fair market value marks are catching up with the company’s problems. The discount is now (19%) from (13%) at the end of 2019. We continue to believe that’s still not a big enough discount. Given this latest downgrade; lower sales; Covid-19 etc we expect FS Investment (FSK) and FS Investment II will be taking a further unrealized write-down at the end of the IIQ 2020.