General Nutrition Inc: Company To Be Sold In Bankruptcy

A judge has cleared the acquisition of General Nutrition Holdings (including General Nutrition Inc.) out of Chapter 11 bankruptcy for $770mn by China-based Harbin Pharmaceutical Group. The transaction should close by year end 2020. The company had filed for bankruptcy in June.

For the only BDC involved – publicly traded Harvest Capital (HCAP) – this is both good news and bad news. Let’s start with the latter: the first lien lender may be paid less than full value from the sale proceeds. The available trade articles are not clear. As of June 2020, the BDC had bought $5.0mn of debt for $4.9mn and had valued its position at just $2.447mn. (We are including here a $1.0mn Debtor In Possession loan funded after bankruptcy, which we expect to be repaid in full). If that holds up, HCAP – whose debt is on non accrual – will write off close to ($2.5mn), probably in the IVQ 2020.

The good news is i) the proceeds may be higher than initially anticipated; ii) any amount recovered will flow back to the BDC, much in the need of liquidity at the moment. However, we will probably not be told the final numbers till the IVQ 2020 results are published.

For HCAP – based on valuation – this was a performing business that we only added to the underperformers in IQ 2020 at CCR 3; dropped to CCR 4 and then CCR 5 in the course of the IIQ 2020 and should be off the books by the end of 2020. HCAP has lost ($0.350mn) in annual investment income, but may gain some of that back in the future from the recovery.

The BDC Credit Reporter, playing armchair credit quarterback, would question why years into the “retail apocalypse” HCAP decided to lend to a brick and mortar seller of nutritional supplements ? To be fair, though, and thanks to the fact that GNC was a public company, we can see that adjusted EBITDA was doing well in the quarter in which HCAP began lending. A year later Adjusted EBITDA had dropped by more than half thanks to Covid-19. Chalk this one up – mostly – to bad luck. After all HCAP was willing to step in with other lenders and become the owner but was beaten out by Harbin.