KLO Holdings, LLC: Update

Did you ever wonder what happened to KLO Holdings LLC (aka Hemisphere Design Works), a kayak manufacturer which was a fruit of the combination of a combination of Michigan-based KL Outdoor and Montreal, Canada-based GSC Technologies ? We did. We last wrote about the business on January 31, 2020 when the business was already in deep trouble and on non accrual since mid-2019. Overall, we’d written three articles about the company, based on BDC valuations and what we were able to learn from the public record.

Now, thanks to a regional publication in Muskegon, Michigan we’ve been (almost) fully updated about what has happened to the company in recent months:

After an abrupt closure last year, kayak-maker KL Outdoors is back under new ownership, and business is “booming,” according to a company representative...KL Outdoors has since been resurrected by the founder of the Canadian company, GSC Technologies, state records show. The company has produced 64,000 kayaks since purchasing the liquidated assets of KLO Industries in June, David Baun of the new KL Outdoors told the Muskegon City Commission earlier this week.“We have 84 employees and we’re looking at continuing to grow,” Baun said.

As of June 2020 there were two BDCs with $11.8mn invested in the 2022 Term Loan of KLO Acquisition and KLO Intermediate – the predecessor company and its subsidiary, as well as in its Canadian company the inelegantly named 9357-5991 Quebec Inc. These were Apollo Investment (AINV) and Cion Investment. The former- public – BDC had written down its $4.8mn stake in KLO Acquisition to zero. (For some reason, Cion, although invested in the same facility still valued its position at $1.6mn).

AINV values its position in the Canadian entity at $2.2mn. Given what we know, we expect that both BDCs will take a 100% realized loss on the liquidation of the company in the IIIQ 2020 results. For AINV, this means a modest loss given the amount involved and the BDC’s size and a more material hit for Cion. We estimate the loss of annual investment income will be ($1.6mn), but that’s already impacted both lenders for over a year.

Neither BDC has revealed much about the fate of KLO since an update was made by AINV on a November 5, 2019 conference call, which amounted to the following:

Regarding KLO, our investment was placed on nonaccrual status last quarter due to the underperformance from lower customer demand, consolidation challenges and higher costs. The company’s liquidity position has continued to weaken. The company expects to complete a comprehensive restructuring in the coming months“.

BDC credit stories like these with their only episodic updates and large omissions are part of the impetus for publishing the BDC Credit Reporter. Otherwise, investors are left with more answers than questions by the BDCs involved and have to read the tea leaves of those gradually reducing quarterly valuations. Back in June 2019 when the company’s debt was first placed on non accrual (by one of the BDCs involved but not the other), the discount taken was just (14%), but then increased to (70%) by year end 2019 and now to (100%) and a likely complete write-off. We wonder if AINV will even mention KLO when reporting third quarter 2020 results ?