Furniture Factory Outlet: Post Mortem

Now that Stellus Capital (SM) has reported IVQ 2020 results, we know the final outcome of bankrupt retailer Furniture Factory Outlet (FFO) that we’ve written about 3 times before. Unfortunately, despite booking a major final realized loss on the investment, SCM’s external manager was tight lipped about many of the details and was even shy of mentioning the company by name. However, from what we can tell the $13.1mn invested at cost as of September 2020 and valued at $2.1mn was written off in this most recent quarter, resulting in a ($10.1mn) realized loss. Virtually all that exposure – and loss – was in the form of first lien debt.

For SCM this means the permanent loss of about ($0.750mn) – taking into account the $2.1mn recovery – of annual investment income. However, the debt has been on non accrual since IIQ 2020 so the impact has already been reflected in the BDC’s most recent results. The company has now been fully removed from SCM’s books.

This has been a material credit set-back for SCM, equal to 3.7% of the BDC’s equity capital at par and more than three quarters of the funds advanced to FFO. From a post-mortem, Monday Morning Quarterback credit perspective this was probably an avoidable loss. As we explained in our prior article – which we’ll quote below – the choice of industry from the outset was problematic and the first lien position in the balance sheet afforded little protection:

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“.