School Specialty, Inc. : Restructured

On September 15, 2020 we heard from School Specialty, Inc. that essentially all its assets had been acquired by a group led by TCW Asset Management and a couple of other partners. The company will now operate as School Specialty, LLC. The company’s Chief Operating Officer has been named Chief Executive Officer.

We’ve been following the School Specialty story for some time and divine – given that the company’s lenders included non-traded BDC TWC Direct Lending – that this is a restructuring, rather than a sale to a third party. The restructuring has been on the cards for some time, as discussed in our earlier article published on April 13,2020.

What we don’t know, though, is how the company was restructured and what the implications will be for different creditors, including TCW Direct Lending. As of the IIQ 2020, the original debt was trading at a discount of only (13%) and $8mn in new debt advanced more recently to tide the business over was carried at par. This suggests the BDC does not expect to take any great write-offs. However, we won’t know anything tangible till when the IIIQ 2020 TCW Direct Lending results are published, when we expect to work out the impact on income and FMV.

The BDC Credit Reporter had rated the company CCR 4, but is now upgrading the rating to CCR 3. We can’t in good conscience place the company back on “performing normally” status (CCR 2) till we see how generous the capital restructure was, and we learn more about the outlook for the school supplies business. We can’t even be sure whether the BDC will be writing off any interest unpaid during a long forbearance period. We believe the odds are high that some income – at the very least – will have been lost.

School Specialty was having trouble even before Covid-19 came along and made matters much worse. Given that TCW now seems to be both lender and investor, this company could be in the database – if not the underperformers list – for many more years to come, rather than being paid off in 2020 as previously anticipated. From what little we know, though, the damage on is a large position for the BDC appears to be modest.