Centric Brands Inc.: Exits Bankruptcy

The long line of companies that filed for bankruptcy as the pandemic took hold in the spring of 2020 is now headed in the other direction with cleaned up balance sheets, new owners and high hopes. Included in this group is Centric Brands, which exited Chapter 11 on October 9, 2020 following a “debt for equity swap” with its well known lenders, including Blackstone and Ares Management. Old debt is being forgiven in return for a controlling equity and new debt (including a securitisation facility) being provided by the owner/lenders.

The BDC Credit Reporter has been writing about Centric for some time, and with special interest, given the large amounts of BDC capital advanced to the company even before the restructuring : $129.9mn at cost. We’re guessing that the valuations by the 3 BDCs involved as of June 2020 must be close to the final deal struck, which has been in the works since the filing in May. Almost certainly written off is the $24.6mn invested in the equity of pre-bankruptcy Centric by Ares Capital (ARCC), which the BDC has written down to zero. That was carried at par back in early 2019.

Then there’s $98.5mn in first lien 2023 Term debt, held by ARCC, TCW Direct Lending VII and Garrison Capital (GARS), which has been discounted between (4%) and (16%) by the lenders involved. There are some “last out” arrangements in the debt which may explain the discrepancies.

Interestingly, and despite the bankruptcy, none of the BDCs carried any of their debt as non-performing as of June 2020. That may be because the 2023 debt was Pay-In-Kind anyway. Finally, there’s $6.7mn in 2021 DIP financing provided by the same trio, which is likely to be folded into the post-bankruptcy capital structure. In fact, we wouldn’t be surprised that after all is said and done the BDCs involved end up with more capital in Centric than ever before.

Exactly how large the realized losses will be is impossible to tell as each BDC might value its new equity stake differently. We’re guessing that total losses booked will be ($35mn-$40mn), or roughly a third of the capital invested at June 30. ARCC will be the biggest loser by far, followed by TCW Direct Lending and with GARS losing ($1mn-$2mn). Losses could have been much higher but the BDCs were positioned above $700mn+ in second lien debt held by Blackstone. That’s the debt being written off and which will reduce leverage by about half. For that Blackstone receives 70% of the equity of the new Centric and the other lenders 30%.

Of course, neither Centric Brands nor BDC exposure is going anywhere and success is not guaranteed. We are upgrading the company from CCR 5 to CCR 3, still on the underperformers list. Centric has had to lay off hundreds of employees and continues to be leveraged, so questions will remain for some time about its viability under its new lender ownership.

We will circle back with an update when IIIQ 2020 or IVQ 2020 BDC results are published and we can ascertain what realized losses were booked and what the revised outstandings look like for all three BDCs involved.

Centric Brands Inc: Reorganization Plan Approved

Since May 2020 Centric Brands, Inc. has been under bankruptcy court protection. Now, though, the company is poised to exit that status by mid-October 2020 following court approval of a reorganization plan and some well placed settlement payments to disgruntled creditors. The deal seems like a debt-for-equity swap, with first lien and second lien lenders receiving equity in the restructured company while continuing as lenders in new, smaller, debt facilities.

After all conditions have been finalized, Centric Brands — whose owned brands include Zac Posen, Hudson and Swims — plans to exit Chapter 11 by the end of October with a “recapitalized” balance sheet, as well as new financing facilities, “significantly reduced” debt and interest payments, plus the full support of all of its lenders.

This is a Major BDC investment by BDC Credit Reporter’s standards: i.e. over $100mn at cost or $129.9mn in this case. There are three BDCs involved, headed by Ares Capital (ARCC), which is invested in both the debt and equity of Centric. Then there’s non-traded TCW Direct Lending VII and publicly traded Garrison Capital (GARS). The debt held by the BDCs matures in 2021 and 2023. The latter with a cost of close to $100mn is valued at roughly a (15%) discount and is likely to be partly written off when the company exits bankruptcy. That will result in about ($15mn) in realized losses along with nearly ($25mn) ARCC holds in the equity of the insolvent entity, or a total loss of about ($40mn). The 2021 debt is Debtor In Possession financing and is likely to be repaid in full. What we don’t know is if the lender-now-owners will have to inject incremental new capital or not. More details to follow.

This will be a significant – but not overwhelming loss, principally for ARCC, and to a much lesser degree for the other two. On the other hand, it looks like all the players will live to fight another day and – potentially – recoup proceeds lost from an eventual sale of the restructured Centric Brands another day.

We will be upgrading the company from CCR 5 to CCR 3 or CCR 4 when the exit from bankruptcy occurs. As we’ve written in earlier articles about Centric, much will depend on how generous the new lender owners have been in structuring the going forward balance sheet. The company continues to operate in an industry – lifestyle brands sold mostly at retail – that continues to be pandemic impacted. Furthermore, some debt for equity swaps in the past have been done with less than generous terms, rapidly returning the business to the bankruptcy court. We hope Centric won’t be a “Chapter 22” story.

Centric Brands Inc.: Files Chapter 11, Restructures.

On May 18, 2020 Centric Brands Inc. announced a major restructuring. This includes the public company going private and a pre-negotiated trip through Chapter 11 bankruptcy. What’s more the company is getting $435mn in Debtor-In-Possession financing to smooth the way forward. $700mn of second lien debt is being written off. The existing first lien lenders – including three BDCs – will be staying on, but will be receiving equity in the new ownership.

Management blames Covid-19 for its troubles. However, back in December 2019 when first wrote about Centric Brands we were skeptical that the company could survive in its then-capital structure where interest expense matched EBITDA. By the time we posted again in April of 2020, the bankruptcy/restructuring die was seemingly cast with only the details to be worked out. Centric was on the BDC Reporter’s Weakest Links list. Like so many other names we’ve placed there, the company now moves to our non performers list until the bankruptcy judge approves this restructuring.

The BDC that will be most impacted in the short term will be Ares Capital (ARCC). At March 31, 2020 ARCC held $24.6mn at cost in Centric Brands public stock, which is now worthless. That will likely result in a ($3.2mn) write-down from the latest valuation and a ($24.6mn) realized loss. Less clear is whether ARCC’s first lien debt ($57.1mn at cost) as well as that of TCW Direct Lending VII and Garrison Capital (GARS) will be getting a haircut. If so, it’s unlikely to be much larger than the (10%) unrealized loss booked at quarter end by ARCC. Income, though, will likely be impacted during the bankruptcy period. We have no idea if accrued interest gets repaid in the new arrangement.

What is likely is that the existing first lien lenders are involved in that very large DIP financing, so BDC exposure – between debt and equity – is likely to increase rather than decrease when all the beans are counted once the restructuring is completed. Moreover, the BDCs relationship with Centric Brands may last a good deal longer now that lenders are becoming part owners. No word yet if any new capital is being injected and by whom.

We are downgrading the company’s credit rating from CCR 4 to CCR 5. After the restructuring occurs – assuming no blips – we will be maintaining the company on our underperformers list. The restructuring does not magically wave away the difficult retail environment Centric is likely to face. Moreover, no news of any new equity capital infusion worries us that the new owners, led by Blackstone, may be undertaking this turnaround too cheaply. Centric Brands would not be the first retail-oriented company that went through Chapter 11 twice… The BDC Credit Reporter will await more details about the transaction and the respective BDCs valuations of their post-recapitalization positions.

We will also be watching how this situation plays out in the context of evaluating how well BDCs like ARCC fare when they transition from lenders to owner-lenders. In this case the BDCs involved appear to have only a minor role to play in the new Centric Brands. Nonetheless, we shall evaluate the age old question of whether this is good money after bad or a masterful way to recoup some, all or more of capital advanced.

Centric Brands Inc.: May File Bankruptcy

According to news reports, Centric Brands Inc. has hired restructuring advisers and is considering a Chapter 11 filing. As always, we know this “from people familiar with the matter”. That’s most likely the borrower, or the borrower’s many professional advisers, whispering down the phone line. Centric designs and manufactures apparel under licensing agreements from brands. A debt load of $1.4bn needs to be restructured. Public shareholders appear to have given up already. The stock trades at $0.77.

The BDC Credit Reporter initiated coverage with a CCR 3 rating back in late December 2019. As you’ll see from a quick reading, we’d reviewed the company’s filings and were already deeply worried before Covid-19 struck. Now a move down to CCR 5 – non performing – status seems all but inevitable. For the moment, we are downgrading Centric to CCR 4, but don’t expect that to be for long.

BDC exposure since we last wrote continues to be “Major”: i.e. over $100mn. At 12/31/2019 there was $123mn invested at cost by three BDCs and an FMV of $113.1mn. Most at risk of loss remains Ares Capital (ARCC) whose $24.6mn invested at cost in the company’s equity is looking fragile. The leading BDC also holds a $57.8mn position in the First Lien 2023 Term Loan, along with TCW Direct and Garrison Capital (GARS). In a bankruptcy we assume there’ll be some kind of debt for equity swap and a haircut will be taken. Judging by year end 2019 valuations from all three BDCs, any loss will be minor as the debt was still valued at par. We remain much more skeptical just by looking at the enterprise value of the business before Covid-19 came along, let alone now.

We will learn more shortly most likely and will come back with a better assessment of what ultimate BDC losses are likely to be.

Centric Brands Inc: Credit Coverage Initiated

We are initiating our credit coverage of Centric Brands Inc. with a rating of CCR 3, dating back to the IIQ 2019. At that time, Ares Capital (ARCC) discounted the value of its $24.6mn equity stake in the company by (24%), from par in the prior period. Given that the company is publicly traded (ticker: CTRC) that reflects a declining stock price, which was as high as $5.33 a share in mid-March. By the end of June CTRC was at $4.11. As we write this on December 28, 2019, the stock price has halved since the summer to $2.15.

Admittedly, most of the substantial BDC exposure of $123.8mn at cost is in the form of Term debt due in 2023, held by the afore mentioned ARCC, TCW Direct Lending and Garrison Capital (GARS). That debt has been valued very close to par since first being booked and remains so in late December, according to Advantage Data’s records.

Nonetheless, even a quick glance at the company’s 10-Q is enough to elicit credit concern. The company is fast growing, thanks to acquisitions in 2018 and 2019, but debt levels are very high and getting higher. We note that Adjusted EBITDA, as reported in the latest 10-Q for the first 9 months of 2019, was given as $122mn. Interest expense – which admittedly includes Pay-In-Kind income – was $142mn…The ‘comprehensive loss” over the same 9 month period was ($171mn). Yes, we know investors are too clever to take GAAP accounting as the be-all in this brave new world of adjusted numbers but that’s still a lot to swallow.

Notwithstanding the apparent complacency of the debt markets, the BDC Credit Reporter is worried about the leverage levels. Our concern is heightened because the amount of total BDC exposure is so high, especially for ARCC and TCW Direct Lending. Any sort of stumble by the company could materially impact book value and investment income earned. Nor should debt holders take too much comfort from the “first lien senior secured” appellation of the $99mn in term debt held by the BDCs. Sitting above them in order of priority is a secured Revolver – led by ARCC as administrative agent – and many of the company’s trade receivables are being sold off in a different financing facility.

We expect that we’ll be updating readers multiple times in the year ahead given that Centric is a public company and every quarter brings a new snapshot of performance. We’ll also keep an eye on stock and debt price performance, even if we don’t fully trust the credit antennas of the latter in the current frothy and generous market conditions.