Sur La Table: Files Chapter 11

The BDC Credit Reporter – and everyone else – saw this coming weeks ago: Sur La Table filed Chapter 11 on July 8 2020. Also not surprising is that the company comes to bankruptcy court with a plan to be bought out by a “stalking horse” bidder- Fortress Investment, which is working with the existing lenders. The lenders are offering debtor-in-possession (“DIP”) financing to bridge this difficult period. (The amount involved is what seems like a paltry $3.0mn, according to court filings). The company itself – which had already reduced corporate staff – will be closing up to 51 of its stores.

From a lender standpoint, this was a borrower already on non accrual since IQ 2020. What is unclear is how the two BDCs with $31.5mn exposure in the company’s first lien debt will fare. Capitala Finance (CPTA) has already discounted its position by (41%) and Blackrock Capital (BKCC) by (34%) – typical of the fluid world of BDC valuations. We’re assuming the two BDCs are involved in the DIP facility and are part of the buying group. More capital – besides writing off debt – may be required in some form. We’re waiting for further filings to get a clearer picture.

What we did learn from the CEO’s first day filings with the bankruptcy court is that he was hired back in August 2019 to turn around the business. Also new to us was that Sur La Table was in default under its debt agreements and raised $15.0mn from its investors on June 12, 2019 to pay down some of the debt and get back in compliance. However, Advantage Data records show that in neither that quarter, nor the quarter before nor the quarter after the default and loan reduction did either CPTA or BKCC discount their positions to reflect the strained situation. The debt, though, did drop from $45mn to $31.5mn.

In an earlier article on June 29, 2020 we mentioned that we were disappointed by the values at which Sur La Table was carried on both BDCs books. This latest revelation in a court filing indicates without a doubt that the company was in deep trouble more than a year ago. Yet, the debt was not discounted on either BDC’s books by a material percentage till IQ 2020. That’s the same quarter as the Term Loan was placed on non accrual. This does not speak well to the valuation methodologies of either BDC involved.

For the moment, the BDC Credit Reporter’s rating remains CCR 5. We’ll provide an update on likely recovery once further details come in.