Borden Dairy: Bankruptcy Auction Completed

After much back and forth and a hard fought auction, bankrupt Borden Dairy was purchased by a joint venture consisting of Capitol Peak and “KKR & Co” according to the Wall Street Journal. (For the record, the WSJ in its article constantly refers to “KKR” as a lender to Borden, but – in fact – the debt is held by two BDCs which the famous investment manager co-manages with FS Investments: non-traded FS-KKR Capital II (soon to have the ticker FSKR) and publicly traded FS KKR Capital (FSK). As we’ve been discussing for months, these two BDCs, the management of which KKR took over from GSO Blackstone a few years ago, have $171mn in first lien debt outstanding at cost to Borden. We’ve read other publications, such as Bloomberg, all of which have not quite cottoned on that KKR’s involvement is through these BDCs which KKR & Co only co-manages and cannot even be called – as one journalist did – “KKR’s credit arm”.

Anyway, as far as we can tell, the two FS-KKR lenders are teaming up with Capitol Peak and will – in all likelihood – undertake some sort of “debt for equity” swap. More details to follow, so we won’t speculate about what the ultimate impact on FSK and FSKR might be. What seems sure is that the BDCs caught up in this bankruptcy will remain involved in the milk business for a long time yet and may yet be putting more capital to work.

Debt for equity swaps have been a way of life in the energy business for years, with unremarkable results for the former lenders as the industry has continued to struggle and is a mighty devourer of capital. Of course there have been debt for equity swaps in other industries as well and we expect the strategy to be the most popular one across the bankruptcy spectrum in 2020. That will leave many would-be buyers of distressed assets – currently raising funds as fast as they can – grinding their teeth. Lenders like KKR/FS Investments understandably believe “anything you can do, we can do as well” and are loath to walk away from troubled situations. So we expect a lot of debt turning into equity; more capital advanced in debt or equity and bold attempts to turn around businesses that have fallen on hard times. Like Borden. Whether that will prove a successful approach overall remains to be seen, but the BDC Credit Reporter will keep score best we can.

For the moment – short on gritty details and with the bankruptcy judge still needing to approve the winning bid – we are not changing any of our ratings. The debt remains rated CCR 5 – non-performing. Expect to be hearing more from us before long.

Borden Dairy: Asset Auction Set For June 2020

By recent large company bankruptcy standards, Borden Dairy has remained under court protection for longer than most. That’s because there was no consensus between the owners and the lenders when the dairy giant first elected Chapter 11, as we discussed at the time. Then there were disputes about how to apply liquidity and plans by bondholders to merge Borden with that other bankrupt dairy name: Dean Foods. The latest news is that the judge in the case has agreed that the company may sell its assets at an auction in June if no other viable restructuring plan does not take precedence.

We have used the opportunity to update the latest numbers from the IQ 2020 results about BDC exposure. Where there were 4 BDCs involved now there are only two because FS Investment II acquired FS Investment III and FS Investment IV. Now there’s $170.5mn at cost of first lien debt exposure divided up between the afore mentioned non-traded FS Investment II and its public sister BDC FS KKR Capital (FSK), split $103.1mn and $67.4mn. That’s much unchanged since the bankruptcy began. The FMV, though, has dropped from $152.5mn before the bankruptcy to $75.7mn. Even since the IVQ 2019 results, when the company was already in Chapter 11, the debt has dropped sharply in value, from $90.5mn. We can’t determine if a further discount is likely, but current market conditions can’t help.

What does seem probable is that some sort of resolution is coming. That means a realized loss is likely to be booked in the IIIQ 2020 which could be as high as ($100-$120mn). (BTW, this is far and away the biggest BDC exposure to a sector that has been in secular decline for years, but we have found two other underperformers in our database with dairy credentials. More on those in future posts).

We wonder if the FS-KKR organization is really interested in becoming an owner of this business in this sector by involving itself in a standard “debt for equity swap“. That will almost certainly require deploying new capital at a time when BDC liquidity is constrained and remaining involved in the milk business with its Byzantine complications for many more years to come. More likely – in our purely speculative view – is that the BDC lenders will let some third party acquire Borden’s assets and take their credit loss medicine and walk away with whatever proceeds are available. We will find out shortly.

Borden remains rated CCR 5 or non performing. Given that BDC exposure is over $100mn this is a “Major” company by the BDC Credit Reporter’s standards, which just means that we keep special tabs on what’s going o because the financial impact is so high. FYI: At the moment Borden ranks tenth highest – on a cost basis – of the 45 “Major” underperforming BDC-financed companies in our database.

Borden Dairy: Seeks Merger With Dean Foods

We wrote extensively about Borden Dairy when the milk giant filed for bankruptcy back in December 2019. At the time there were many unresolved items as management chose to proceed with a filing without the agreement of its lenders, so there was no tidy restructuring package pre-agreed to light the way forward. In the interim there has been much maneuvering between the stakeholders in and out of court, but still no exit plan is in place. Now the bondholders of the company and those of Dean Foods – also in Chapter 11 – want to merge the two companies. This is occurring even as Dean is well on its way to merging – in a $433mn deal – with a dairy co-operative. As the Wall Street Journal reports, there are anti-trust issues still plaguing that transaction.

So, the Borden and Dean bondholders are promising – sort of – to invest $1.0bn in new capital in this tie-up of two bankrupt companies. We’re not here to handicap the chances of Dean’s current deal falling apart and Borden having the chance to step up. We’re writing to point out that IF that should happen BDC exposure is likely to grow from its current $171mn level to an even higher number if FS KKR Capital (FSK) and FS Investment II are part of that $1.0bn new financing.

Obviously, the BDC lenders will argue that it’s not good money after bad, and will keep them from writing off even more if the Dean deal slips away. How much that might be is unknowable after months of no resolution. Neither the BDC Credit Reporter nor anyone else can really handicap those odds. We should learn relatively soon,though, if this “hail mary pass” from the Borden/Dean bond holders will change the narrative as the judge will – presumably – want to adjudicate on the original transaction before long. We’ll be getting back to readers when any kind of decision is made.

Borden Dairy: Files Chapter 11

2020 has started with a bang where BDC credit challenges are concerned with one of the biggest BDC-funded bankruptcies in recent memory. On January 7, 2020 Borden Dairy filed for Chapter 11. Management set out its goal as follows: “The Company intends to use the court process to pursue a financial restructuring designed to reduce its current debt load, maximize value and position the Company for long-term success. Borden plans to continue operating in the ordinary course of business, under the court’s supervision“.

Lenders were not sympathetic or supportive. As the Wall Street Journal reported, the principal lenders to the company complained that a Chapter 11 filing was not necessary, and seemed more like a gambit to avoid whatever concessions might have been necessary with its creditors. Apparently, negotiations had been ongoing for some time. One lender complained that Borden made the bankruptcy move without notice to its lenders (which is very common but still shocking to some) and without bringing on specialized turnaround personnel.

The principal complaint the lenders seem to have is that Borden is not really that financially damaged. The company itself admitted being EBITDA positive and one of the two private owner groups was sanguine about retaining “primary ownership of the business after the bankruptcy”, which does not signal extreme distress. Anyway, that’s for the court to decide about but does imply that the chances of recovery for senior creditors is higher than average.

That’s good news for the 4 BDCs involved – all part of the FS-KKR Capital complex: publicly traded FSK and its three non-listed sister entities: FSIC II, FSIC III, and FSIC IV. The face amount of debt at risk – all in the 2023 Term Loan – is huge by BDC standards: $175.0mn. (Here’s another example of how the BDC sector has expanded way beyond its origins financing supposedly capital starved lower middle market private companies. Borden – by contrast – boasts $1.18bn in 2018 sales and 3,300 employees). The bankruptcy will interrupt annual investment income of nearly $16.00mn. However, if Borden management gets its way, that might only be a matter of a few weeks.

More important will be what happens to the 2023 Term Loan and the rest of the company’s liabilities. Clearly, there is no consensus between the owners and creditors so pretty much anything could happen and we are not privvy to any of the plans. As always in these situations where the debt is publicly traded – more often than not these days – we look to Advantage Data’s real time loan pricing module which shows the 2023 debt trading at a (13%) discount to par. That’s in line with what the debt was valued on the BDCs books at September 30, 2019 and gives a hint of what haircut these lenders might have to take. That would be a Realized Loss of ($23mn).

Yet, it’s too early to start counting beans. This could come and go out of bankruptcy very fast and with little impact on the lenders or something else altogether could happen. Once a company throws itself on the mercy of the bankruptcy court anything can happen. We’ll provide updates as any material news appears.

Unfortunately, though, this is prospectively another credit black eye for KKR, which only took on the credit in the IIIQ 2017 and which has committed a great deal of capital to this borrower. KKR is sparring with Acon Investments – the private equity group on the other side of the table; as opposed to finding the mutually agreeable middle way that some other transactions have gone down. This will be a useful test of how well originating and leading a debt tranche will serve KKR – and its BDC shareholders. Who will prevail – if anyone – in the test of wills and documentation that is shaping up between owners and lenders ?

For our part, we didn’t even have Borden on our Under Performers list until after the IIIQ 2019 BDC debt valuations were published when the FS-KKR entities marked the Term Loan at a (12%) discount, which caused us to give Borden a Corporate Credit Rating of 3. Of course, that’s now been dropped to a CCR 5 (Non Performing) just a few weeks later. It’s worrying to us, and should be to anyone invested in credit, how quickly companies can go from apparently performing modestly below expectations to standing in front of a bankruptcy judge. We are going to respond by being more vigilant and ready to add new names to the Under Performer List at the very earliest signs of trouble. Forewarned is forearmed.