We’re a few weeks late to this news but troubled retailer Furniture Factory Outlet, LLC filed Chapter 11 on November 5, 2020. This was no great surprise as the company – as discussed in two prior articles – has been underperforming even before the pandemic began. With Covid-19 in the mix, the company entered a spiral, went on non accrual and is now under court protection and has a $7mn “stalking horse” bid from American Freight. Apparently Furniture Factory has $50mn in funded debt to contend with and liquidity challenges.
This looks like the final nail in the coffin for the company’s only BDC lender/investor: Stellus Capital (SCM). The $18mn invested – mostly in first lien debt – was written down to $2.1mn as of September 2020. That value was probably set with the knowledge of the pending bankruptcy. The chances are SCM will have to write off 90% – or even more – of its capital invested, but no material further change in value is likely, if only because the remaining value is so low. The first lien and small subordinated loan SCM holds were generating $0.9mn a year of investment income through IQ 2020.
We checked and confirmed that the company remains in bankruptcy here in mid-January 2021. This might push a final resolution – and a realized loss – to beyond the IQ 2021. At this point, though, there’s no reason to believe that the company is anything but a large loss – albeit one that has been in the cards for months – for SCM.
The furniture business – as old credit hands like the BDC Credit Reporter will tell you – is a notoriously difficult industry to lend into, even if the bulk of your exposure – as with SCM – is nominally in first lien debt. This investment by SCM dates back to 2016, before the general “retail apocalypse” became crystal clear to all. However, as recently as IQ 2018, the BDC doubled its exposure, just when mall vacancies in the U.S. reached a six year high. In retrospect, SCM may have wished they had headed in the opposite direction.