Art Van Furniture, which is held by AVF Parent, is in Chapter 11 bankruptcy, and was proceeding – til the impact of the coronavirus was fully felt – with the process. (We last and first wrote about the company back on March 5, 2020). Now the company and its creditors – in a highly unusual move in these extraordinary times – seem to have agreed to put the bankruptcy process into deep freeze for several weeks. That was the case made by attorneys for AVF Parent to the judge in the case.
The problem is that the states in which the furniture retailer operates are on lockdown, which coincided with the attempted liquidation of much of the furniture. With all prospective customers huddled at home, the “going out of business” banners have been put away and a different approach sought. As the Law360 article we consulted for this report explained: “With this plan in place, .. the debtors hope to preserve [their] options to restart going-out-of-business sales at the bulk of AVF’s] stores and possibly revive a scuttled deal to sell 44 others as a going concern”.
We’re not sure how the judge will rule but that’s one more spanner in the works for creditors – including the two BDCs with exposure in the company’s 2024 Term Loan – getting much in way of a recovery. At year-end 2019, the debt was already on non accrual and discounted by FS-KKR Capital (FSK) and FS Investment II by (67%). At time of writing – March 31 2020 – the debt was trading at a discount of (84%). This suggests the two BDCs should not be expecting to get much more than crumbs in the ultimate resolution and that realized losses – probably recognized in the IIQ 2020 – will be huge: somewhere around ($150mn).
Ouch ! This one is going to hurt. Art Van Furniture (aka AVF Parent in Advantage Data), the largest furniture retailer in the Midwest, has begun to liquidate the inventory at all its company owned stores. “Despite our best efforts to remain open, the company’s brands and operating performance have been hit hard by a challenging retail environment,” the company spokeswoman Diane Charles said in a statement. According to news reports there is still a chance the company will find a buyer, but the odds don’t look great. Not helping the matter is that the CEO has just resigned. A bankruptcy filing is imminent. This could end up Chapter 7 rather than Chapter 11.
Chances are the $169mn invested in the first lien debt of the company by 4 related FS/ KKR Advisor LLC BDCs is going to take a big hit. At December 2019, the only BDC lender to have reported so far – publicly traded FS KKR Capital (FSK) – has already discounted its $55mn at cost to $18mn. Even that ($37mn) write-down may not be As Bad As It Gets. If the company ends up liquidating completely, net proceeds may be even lower. Have you ever tried to sell furniture in a hurry in the midst of a health crisis ? The Term Loan in which the BDCS are invested sits behind an $85mn asset-based Revolver, which may sweep up all proceeds.
Let’s tot up the damage. Total investment income lost already thanks to the company being on non-accrual since the IIIQ 2019 on debt charged at LIBOR + 725 bps: about ($15mn) per annum. The unrealized losses in aggregate will be ($115mn). As we’ve discussed this will translate into an equal or greater realized loss. At worst, we wouldn’t be surprised if ($150mn) was written off. Or even the full ($169)mn…
For the FS KKR organization this has to be a major reverse. Still, the initial investment in a furniture retailer – almost a code word for risk amongst old time lenders like the BDC Credit Reporter – dates back to IQ 2017 when GSO Blackstone was in charge of underwriting. The initial exposure was $130mn., all in the same 2024 Term Loan that’s in trouble today. The first crack in the valuation didn’t occur till IIQ 2018 by which time $174mn was at risk. Still, the valuation discount did not exceed our hurdle of (10%) till the IIQ 2019. Two quarters later, Art Van Furniture was on non accrual and now in liquidation.