After much back and forth Bluestem Brands Inc. has been acquired out of bankruptcy by its lenders – led by Cerberus Capital Management. The centerpiece of the deal ? Forgiveness of $250mn in debt in return for control of the company in a “debt-for-equity” swap. These details are from a Wall Street Journal article on July 7, 2020. Haggling continued till the very end. At first the buying group offered $300mn, then $200mn and finally $250mn, as discussed in prior articles.
For the four BDCs involved with $34.0mn invested at cost – all in debt – this brings the day of resolution and restructuring closer. The BDCs have already written down their pre-petition positions by (31%)-(40%). We estimate that discount will increase to (55%) when all is said and done. The post-petition debt should get repaid in full or rolled into whatever new capital structure the new owners envisage. Expect to see significant realized losses booked in the third quarter 2020, in the order of ($12mn-$15mn).
Unknown – but not unlikely – is that Main Street (MAIN); HMS Capital; Capitala Finance (CPTA) and Monroe Capital (MRCC) will need to advance more capital going forward to give Bluestem a chance at success. Our readers may expect to be reading about the company – maybe under a new name – for some time to come. The good news ? Maybe some portion of the debt will start paying out its lenders again shortly.
However, the chances of a Chapter Twenty Two, i.e the business falling back into bankruptcy again remain high given the difficult market conditions. Also, much depends on how generously the new Cerberus-led group carves out a new capital structure. We’ve seen multiple examples of new, lender-led groups being shy about making the necessary sacrifices in writing off debt and not injecting new capital. Maybe it’s not in the DNA of lenders more intent on getting their money back than ensuring a business thrives. We need to dig deeper and find out what sort of plan Cerberus and its group has in mind.
As we last wrote on March 11, 2024, Bluestem Brands is in Chapter 11. Now we hear from the Wall Street Journal that the “stalking horse” offer by Cerberus and a group of lenders to the company has been reduced from $300mn to $200mn. Further details are as yet unavailable.
The implications for the 4 BDCs with exposure – which has now increased to $34mn as the lenders provide DIP financing which is performing – are not clear. We expect the BDCs are part of the Cerberus headed attempt to undertake a debt for equity swap. Clearly market conditions have deteriorated since the bankruptcy. This might result in each lender getting a bigger equity slice of a smaller pie or cause another buyer to swoop in or delay the exit from Chapter 11, which has the effect of depleting cash resources. (Bankruptcy is a very expensive process, and this one will shortly be entering its fourth month).
The BDCs involved in the original debt have already discounted their loans by (40%) as of March 31, 2020. Given the reduced perceived value of Bluestem, this might result in a yet bigger discount as of the June 30 valuation and a bigger realized loss when this phase is completed. The $6.3mn in DIP financing, though, should continue to be unaffected for the moment. We maintain the company’s CCR 5 rating.
This drop in the value of Bluestem is emblematic of what is likely to happen to recovery values going forward. Before Covid-19 struck, bankrupt companies were – by and large – retaining much of their value given plentiful capital in the market. Now buyers, investors and lenders are all pulling out their forensic microscopes and values are dropping. We’ll be interested to compare the final discount the lenders have to absorb against the March 31 value when this transaction plays out. It will be instructive both about Bluestem Brands and about recovery expectations more generally. The BDC Credit Reporter guesses we could see a substantial further drop. This is what happens in recessions. The days of a V recovery seem far off.
After many quarters of balancing on the brink, Bluestem Brands Inc. has filed for Chapter 11. In a press release, the retailer indicated its commitment to remaining in business through the bankruptcy process, and the arrangement of a $125mn DIP financing by a “syndicate of lenders”. The “syndicate” is also serving as a “stalking horse bidder” for the company’s assets, and seeks to de-leverage and restructure the company’s balance sheet.
Who are the members of the syndicate ? Not disclosed. What might the assets be valued at ? Not mentioned ? How much debt might be wiped from the balance sheet ? Still to be determined. Nonetheless, this seems to be a classic debt-for-equity swap where the lenders become part, majority or the exclusive owners of the new Bluestem Brands. Sometimes that works, and sometimes not.
We’ve been writing about Bluestem Brands for a very long time, both in the BDC Credit Reporter and in our database of all under performing BDC companies that we maintain. Barely a week ago we wrote to ourselves the following summation of our views:”3/4/2020: We worry that Bluestem might be about to meet its moment of reckoning in 2020 with the need to repay its publicly traded Term Loan in November 2020 and its modest liquidity above the mandated level at the end of the IIQ 2019. Sales and EBITDA trends are either anemic or negative. The debt is already discounted by nearly a quarter. As a result, we’ve added the company to the 2020 At Risk Of Non Accrual list.”
Now that’s happened we’ll be interested to see what the 4 BDCs with $28.2mn of exposure at cost – Main Street (MAIN); Capitala Finance (CPTA); Monroe Capital (MRCC) and non-listed HMS Income – will be doing. We imagine they are committed to a portion of the DIP financing and are likely to end up as owners, and may also be committing more junior capital. As mentioned above, we don’t know how much historical debt will be forgiven. So any sort of valuation is hard , but Advantage Data shows the 2020 Term debt in which all the BDCs are invested trading at a (29%) discount; just slightly worse than the recently announced IVQ 2019 (25%) discount announced by the three public BDCs. That suggests, but does not guarantee, the eventual realized loss to be taken might be over ($8mn). In an earlier article, though, we’d been estimating ($15mn). More immediately, income forgone will be about ($1.4mn) annually, mostly absorbed (4/5ths) by sister BDCs: MAIN and HMS Income.
We will report back as we learn more about how this bankruptcy will play out, and what individual BDC exposures to old and new capital (if any) will look like.
Just in case you didn’t know, it’s the companies themselves who pay for their credit ratings from groups like Moody’s and S&P. (That’s different than at the BDC Credit Reporter, whom nobody pays). We were reminded of this economic fact of life on hearing that Moody’s has “withdrawn’ the ratings of retailer Bluestem Brands. The rating firm – usually prone to long discussions in its regular credit reports – was succinct on this occasion: “Moody’s has decided to withdraw the ratings because of inadequate information to monitor the ratings due to the issuer’s decision to cease participation in the rating process“. No other explanation was given.
Apparently S&P Global has not been any kind of succor. That rating group downgraded the company on January 28, 2020 to CCC- from CCC..Here’s the crux of the matter as S&P sees it: “
“Bluestem’s revolver and term loan are due this year and we believe the likelihood that the company will undertake a restructuring in the near term has increased. The company’s $200 million asset-based lending (ABL) facility matures in July and its term loan (roughly $400 million outstanding) comes due on Nov. 7, 2020. In our view, Bluestem does not have a clear refinancing plan and we believe it is increasingly likely that the company will pursue a holistic debt restructuring to address its maturities given its weak operating performance. If the company pursues a restructuring or exchange that provides its lenders with less than they were originally promised under the security, we would view it as distressed and tantamount to a default”.
We’ve written on three earlier occasions about Bluestem, starting back in the spring of 2019. As far back as June 2019, we had a Corporate Credit Rating of 4 on the company – on our five point scale. More recently, when we began projecting out which BDC-financed under-performing companies were most likely to default in 2020, Bluestem was one of our first additions. Now there seems to be a consensus building that the company will not be able to avoid either a “distressed debt exchange” or a Chapter 11 filing in the months ahead.
For the 4 BDCs involved – all in the 2020 Term Loan, which is structurally subordinated to the Revolver (as far as we can tell) – that’s bad news. Not helping is that S&P is only projecting a 45% recovery rate in event of default. That implies ultimate losses of over ($15mn) over cost, or about ($6mn) more than already provided for at September 30, 2019. Then there’s the $2.7mn of annual investment income at risk of interruption…
We expect to be revisiting Bluestem – and its intractable balance sheet inside a retail sector in seemingly permanent crisis – before long.
We’ve written about Bluestem Brands before on two occasions, on April 12, 2019 and June 19, 2019. Now the multi-name retailer – whose results are publicly made available every quarter – has just completed its IIQ 2019 results. Unfortunately, the turnaround at Bluestem continues, and there are signs that the situation is getting a little worse. We won’t undertake an in-depth diagnosis, although we’ve reviewed both the earnings press release and the Conference Call transcript.
We’ll focus on a key metric – and one of two material debt covenants. Required minimum liquidity – demanded by the senior lenders – is $40mn. This quarter, Bluestem had $50mn, down from $59mn the prior quarter. That’s pretty close, and principally why we’re writing this update.
We have a Corporate Credit Watch of 4 (Worry List) for the company, which has been “troubled” since 2016. The latest results don’t change our rating, but we continue to worry that the company is just one reverse away from a covenant default. That would not be the end of the world, but might suggest the attempt to turnaround the business with its current capital structure is unfeasible. That might involve some debt haircut in some form. Given BDC exposure of $29mn – already discounted – by (23%) by 3 of the 4 BDCs, there could be some further Unrealized Losses to come in the short term.
(We should point out that – for reasons unknown – Capitala Finance (CPTA has only a (4%) discount on its share of the 2020 senior debt, one sixth of what Main Street Capital (MAIN), HMS Income and Monroe Capital (MRCC) have valued the same exposure. There’s been a deviation between CPTA and the other BDCs for several quarters, and we don’t know why. If matters do get worse, CPTA – with $3.7mn of debt at cost – has the farthest to fall).
On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable). Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.
The troubled e-commerce retailer published quarterly and annual results for the period ended February 1 and 2, 2019. Despite closing down several brands and taking one-time losses, the Company’s Adjusted EBITDA and key bank covenants, as well as liquidity, all appear better. May stop the gradual erosion in BDC debt values underway since late 2016, which peaked in IVQ 2018. We updated the Company file and the BDC Credit Reporter’s views accordingly. For all the details, see the Company File.