We’ve written extensively about publicly traded Sequential Brands (ticker: SQBG) , beginning in the spring of 2019. In a nutshell, the company has a huge amount of debt but only modest revenues and EBITDA – both of which are in decline – to service their obligations. The debt has required multiple waivers from lenders, which continue at present. On July 26, 2021 Sequential filed an 8-K discussing the non-filing of its financial statements as required by NASDAQ. Making matters more complicated, the Board of the company has now recognized that the 10-K and its IIIQ 2020 10-Q require restatement and can no longer be relied on. The company has a plan to deal with these inadequacies but admits that nothing is yet resolved with its lenders despite months of negotiations:
“The Company cannot assure you that its lenders would be willing to negotiate further changes to its financial covenants when necessary and the Company cannot obtain further waivers of the defaults under the Credit Agreements without the consent of the respective lenders thereunder. If the Company is unable to obtain additional waivers of ongoing defaults, or otherwise is unable to comply with its debt arrangements, the obligations under the indebtedness may be accelerated. If an acceleration were to occur, the Company does not have sufficient liquidity to satisfy the loan, and the Company would potentially need to seek protection under the federal bankruptcy code“.
For a time common stock investors – apparently believing in the fundamental value of the many brands Sequential licenses – were looking beyond these difficulties, pushing the stock price to nearly $40 a share in March. However, the mood is darker now, with the stock price under $10 a share. Likewise, back in 2019 and 2020 we were surprised by the full valuations the BDC lenders to Sequential were continuing to book, despite the very obvious challenges.
However, that has changed of late and may change again once a resolution is reached. As of March 31, 2021 BDC exposure to Sequential remained huge: $290mn. All but $10mn (which is in equity) consists of debt due in 2024, split between FS KKR Capital (FSK) and Apollo Investment (AINV). (95% of the debt and all the equity is held by FSK). Currently, the equity has been written to zero – the stock price notwithstanding. The debt is discounted as much as (18%), but seems to be current. (We have to wonder if Sequential is actually paying its interest bill in cash or the lenders are just adding the amount due to the principal, and what might happen when a settlement occurs. FSK and AINV might have to unwind income previously booked).
Anyway, trying to handicap how this transaction might end up for the BDCs is well nigh impossible. Sequential has been shedding assets but the proceeds are too modest to ameliorate the overall picture by much and will only add to the income decline. Everything seems to point to the lenders taking over in some sort of bankruptcy filing before long. However, whether this will be just a modest setback – especially for FSK – or a major realized loss, remains unclear. We will continue to watch this unfolding story and will be interested to see how FSK and AINV value their investments at June 30, 2021 and whether they speak to the subject on their upcoming conference calls. (AINV reports 8/5/2021 and FSK 4 days later).