The hits just keep on coming to retailers. On August 2, 2020 Le Tote Inc. , which owns Lord & Taylor , filed for Chapter 11. As in most cases these days, this was not a surprise. Back in April the BDC Credit Reporter wrote two articles about the upstart company that had acquired the venerable but failing Lord & Taylor and tried to create a hybrid online bricks and mortar retail concept. Already then Le Tote was rated CCR 4 and was on our Weakest Links list.
To get out of its current predicament the company “will simultaneously solicit bids for a going concern sale of both its Le Tote and Lord + Taylor businesses, and conduct targeted store closing sales to maximize the value of its business“. No word on any Debtor In Possession (DIP) financing, which is worrying. There does not seem to be any “stalking horse buyer” either. The company has agreed with its lenders to use cash collateral to fund operations going forward.
From a BDC perspective, nothing has changed in terms of exposure from our earlier posts. This is likely to be a material setback for the Carlyle organization as its public and private BDCs TCG BDC (CGBD) and TCG BDC II are major lenders to the company. According to news report, Le Tote’s total debt is just $137mn and the Carlyle exposure is $27.9mn. (75% is held by the non-traded BDC). Furthermore, we’d guess the BDcs will have to recognize a substantial devaluation of their debt which was only discounted (7%), even though the debt is second lien in a business clearly headed to disaster. Judging by market conditions for retailers of every stripe and the junior position in the debt stack, this could result in a complete write-off for the two Carlyle entities. Investment income at risk is ($2.0mn) per annum.
Unless we’re much mistaken – which happens – this will be a black eye for the Carlyle Group’s BDC lending. It’s not just the amounts involved, which are relatively modest given the size of the two funds, but the very fact of choosing to lend as recently as IVQ 2019 in an industry where the word “apocalypse” is constantly being used. There’s been no discussion of this credit on CGBD’s past conference calls but the subject may get addressed when IIQ 2020 results are reviewed.
In the interim, we’ve downgraded Le Tote to CCR 5 and removed the name from our Weakest Links list (which is shrinking for all the wrong reasons). This is the second BDC-financed company to file for bankruptcy in August already and the 42nd for the year. See the BDC Credit Reporter’s Bankruptcy list.