Sequential Brands: Auction Cancelled

Bankrupt Sequential Brands was going to hold an auction for its multi-brand assets, but ended up cancelling. Some of the company’s brands – like Jessica Simpson which was sold back to the celebrity herself for $65mn – were disposed of previously. The principal transaction, though, was a $330mn bid by Galaxy Capital Partners, a portfolio of Gainline Capital Partners – a PE group. Earlier this year, Galaxy bought Apex Global Brands including, Hi-Tec, Magnum and Tony Hawk and has licensing deals with top brands such as Justice, London Fog and many others.

This transaction is being financed with $55mn in cash and the assumption of debt. That debt is held – amongst others – by the two BDC lenders involved – FS KKR Capital (FSK) and Apollo Investment (AINV) to the tune of at least $231mn. As far as we can understand, Galaxy will be the new borrower and FSK – and to a much lesser degree – AINV, will also hold an equity stake in the business.

How all this gets reflected in the two BDCs schedule of investments is impossible to tell in advance. We’d guess that the $3.0mn in equity FSK invested in Sequential might be written off. AINV’s debt was valued at a discount of (12%) as of June 30, 2021 and might result in a haircut but total exposure at cost was only $12.6mn, so any impact will be minimal.

The most intriguing question is how FSK – with $216mn invested at cost in debt treats that investment. We expect no loss will be recognized but some portion of the debt may be converted into equity in Galaxy. Also unknown is whether the new facility will be priced as attractively as the advance to Sequential: LIBOR + 875%. When we get those sort of details we’ll be able to tell what the impact on FSK’s investment income – seemingly running at $24mn per annum before the bankruptcy – will look like. There’s some financial sleight of hand going on here, but the bottom line is that FSK – and seemingly AINV – are undertaking a mixture of a debt refinancing and debt for equity swap.

Sequential remains rated CCR 5 until the bankruptcy judge approves the many moving parts of this transaction and Galaxy gains control. We’ll report back when we hear more from the BDC lenders involved.