The plot thickens at Serta Simmons Bedding just two days after the BDC Credit Reporter last wrote about the mattress giant. A June 11 article in the Wall Street Journal describes an ongoing legal battle between two different groups of lenders for control of the company, which is teetering on the edge of bankruptcy. On one side there’s Apollo Global Management and on the other Advent International and a group of debt holders (led by mutual funds that invest in debt) that includes the only BDC with exposure: Barings BDC (BBDC).
What’s important to know is that BBDC’s group, working with Advent, is offering a debt for equity swap, summarized thus by the WSJ:
“The traditional loan funds that own most of Serta’s debt made a counteroffer to Advent, pledging to lend Serta $200 million and to exchange about $1.3 billion of loans they owned for $875 million of new ones, reducing the company’s overall debt by $400 million. But the funds, many of which bought their loans years ago for face value, demanded that the new debt they purchased and swapped into have first claim on all of Serta’s assets, essentially leapfrogging Apollo and other lenders. Advent took the offer from Eaton Vance and the other mutual funds, prompting Apollo and its group to ask the court to block the deal“.
Who knows who will win this legal battle ? We don’t and – in any case – the terms could change again. However, this does give us a glimpse of how BBDC is prepared to proceed: advancing more monies; remaining a lender but also becoming an equity investor. That would tie the BDC to Serta’s fortunes for many years to come and increase its total investment outstanding, though likely only modestly.
Not to make too much of one incident in one company by one BDC, but the BDC Credit Reporter believes the strategy being chosen for Serta may be repeated many times over in the months ahead as more companies face or file bankruptcy. Big asset managers like Barings – with plenty of cash, big teams of professionals standing by and an army of lawyers on retainer – will – most of the time – choose fight over flight. The relative portion of any debt owed that will be turned to equity and any new cash to be advanced will vary by transaction but the basic model will be the same.
If played out dozens or hundreds of times as we expect, this will continue to shift the traditional roles of lenders to non-investment grade companies. No longer do mutual funds, BDCs or other lenders just supply inexpensive first and second lien debt but are also seeking to be owners when necessary to protect their interests. This could never have happened when banks dominated leveraged lending in years past, but asset managers, mutual funds and other non-bank groups do not have the same regulatory requirements or the same mindset. The Covid-19 recession (still looking for a good name) could accelerate this shift that’s been underway beneath the radar for years.