After much back and forth Bluestem Brands Inc. has been acquired out of bankruptcy by its lenders – led by Cerberus Capital Management. The centerpiece of the deal ? Forgiveness of $250mn in debt in return for control of the company in a “debt-for-equity” swap. These details are from a Wall Street Journal article on July 7, 2020. Haggling continued till the very end. At first the buying group offered $300mn, then $200mn and finally $250mn, as discussed in prior articles.
For the four BDCs involved with $34.0mn invested at cost – all in debt – this brings the day of resolution and restructuring closer. The BDCs have already written down their pre-petition positions by (31%)-(40%). We estimate that discount will increase to (55%) when all is said and done. The post-petition debt should get repaid in full or rolled into whatever new capital structure the new owners envisage. Expect to see significant realized losses booked in the third quarter 2020, in the order of ($12mn-$15mn).
Unknown – but not unlikely – is that Main Street (MAIN); HMS Capital; Capitala Finance (CPTA) and Monroe Capital (MRCC) will need to advance more capital going forward to give Bluestem a chance at success. Our readers may expect to be reading about the company – maybe under a new name – for some time to come. The good news ? Maybe some portion of the debt will start paying out its lenders again shortly.
However, the chances of a Chapter Twenty Two, i.e the business falling back into bankruptcy again remain high given the difficult market conditions. Also, much depends on how generously the new Cerberus-led group carves out a new capital structure. We’ve seen multiple examples of new, lender-led groups being shy about making the necessary sacrifices in writing off debt and not injecting new capital. Maybe it’s not in the DNA of lenders more intent on getting their money back than ensuring a business thrives. We need to dig deeper and find out what sort of plan Cerberus and its group has in mind.