According to news reports, Deluxe Entertainment has sold most of its business divisions to Platinum Equity. (Deluxe Entertainment’s creative businesses are not included in the acquisition. They will remain operational, but drop the “Deluxe Entertainment” name). Financial terms were not disclosed.
As we’ve written about extensively, Deluxe Entertainment has been owned by its lenders since a debt-for-equity swap and a trip to bankruptcy court last year. Then, Covid-19 wreaked havoc on the entertainment sector starting in March 2020 with unknown, but likely harsh, consequences for the company. As a result, there is no assurance that the new owners of parts of Deluxe Entertainment received much in proceeds from the sale. Furthermore, what happens to the remaining and re-named divisions is unclear.
There are two BDCs with exposure to the post-bankruptcy company: Harvest Capital (HCAP) and non-traded Cion Investment, each in very different parts of the capital structure. HCAP already booked a ($2.4mn) realized loss back in 2019 when the company was restructured and now holds $0.5mn in a second lien Term Loan and $2.1mn in equity (0.63% of the company’s equity). We’re guessing any proceeds will be modest. Cion Investment has much more capital at risk: $24mn in First Lien debt and $9.9mn in the second lien Term debt. And no equity.
We’ll learn more about how this sale trickles down to the two BDCs involved when IIQ 2020 results are known. The BDC Credit Reporter’s best guess, though, is that this experiment in lenders owning an entertainment business in Los Angeles will shortly be over. Notwithstanding the sale, we expect further realized losses are likely.
We are downgrading Deluxe Entertainment from a Corporate Credit Rating of 3 to CCR 4, as we expect some sort of realized loss to be realized. More details to eventually follow.