Men’s Wearhouse Inc. Files Chapter 11

On August 2, 2020 Tailored Brands – the parent of Men Wearhouse Inc. – filed Chapter 11. The BDC Credit Reporter has been writing about the troubled men’s clothes retailer since September 2019. In our most recent post on May 9, 2020 we predicted the company was likely to file for bankruptcy protection. In the last few days, the financial press has been abuzz with similar predictions. So, in two words: no surprise.

As per the new normal in leveraged lending, the company has agreed a restructuring plan with its senior lenders for a “debt to equity swap”, which will see $630mn of debt written off in return for a controlling interest in the business. In addition – and critically important from both a borrower and lender perspective because liquidity is tight and the future of all retail uncertain – the lenders are offering up $500mn in Debtor-In-Possession (“DIP”) financing. $400mn of that debt – unlike your bog standard DIP loan – will convert into longer term financing when the partly de-leveraged company exits bankruptcy. For more information, Tailored Brands has its own website on the subject.

Thankfully, BDC exposure – as we’ve noted previously – is modest, with only Barings BDC (BBDC) involved, with a $9.9mn position in the first lien debt and already written down by two-thirds. For a while income will be lost on the debt – we presume – to the tune of under ($0.35mn) a year. More importantly, the BDC will be booking in the IIIQ 2020 a Realized Loss of ($6mn-$7mn). Chances are high, though, that BBDC will be required to ante up for the DIP /long term financing. Along with the equity, BBDC will be tied to this men’s clothing business for many years to come. However, the amount at risk – even after their portion of the DIP is funded – should barely be material.

Nonetheless, this is a setback for a “first lien secured loan” that was thought of when first booked by BBDC in the IIIQ 2018 to be low risk, given the pricing was LIBOR + 325 bps. The likely recovery of one-third or less is also a reminder that sitting high on the capital structure is no guarantee in and of itself of low losses.

For our part, we’ve downgraded the company to CCR 5 (non performing) from CCR 4, and added the business to the Bankruptcies list we maintain, the first of August. The company has been removed from the Weakest Links list. We’ll circle back at the earlier of hearing from BBDC or learning more about whether the court approves the prepackaged restructuring plan. We expect to eventually upgrade Men’s Wearhouse when out of bankruptcy to CCR 3. That’s still on the underperforming list because the company will still be substantially leveraged and still in retail and still selling business wear when most everybody is wearing pajamas.

By the way, by our estimate, is still a First Wave bankruptcy: a company that was in deep trouble due to shifts in retail and consumer taste even before Covid-19. The business would have likely ended up in a similar place in the months ahead anyway even without the impact of the virus. The damage,though, to the company and to its lenders is that much worse because of what has been happening since March and the recovery therefrom that much more difficult.

Men’s Wearhouse: May File Bankruptcy

We’ve seen this movie before: a company gets into trouble; hires “financial advisers”; drops anonymous hints about possibly filing bankruptcy and then – nine times out of ten – does just that. Men’s Wearhouse is in the midst of that time honored process right now with “people familiar with the matter” whispering to Bloomberg about Chapter 11 as an option being considered.

For the BDC Credit Reporter, this does not move the needle as we’ve rated the company CCR 4 and added the name to our Weakest Links list since March 2020 when operational steps being taken let us know the situation was getting dire.

There’s no change in BDC exposure – which remains solely in Barings BDC (BBDC). We only write this update to warn readers that the headline “Men’s Wearhouse Files Chapter 11” might be flashing over the news wires soon.

Men’s Wearhouse: Close Fulfillment Center, Stores

Tailored Brands Inc., the parent of Men’s Wearhouse clothing stores, announced on March 19, 2020 that it will close its e-commerce fulfillment centers from March 20 through at least March 28, out of concern over the COVID-19 pandemic. The company is also suspending operations in its retail stores during that period. The stock price of the retailer – already headed downward for months – has dropped to just over $1 share.

We last wrote about Men’s Wearhouse in December 14, 2019, when we maintained our CCR 3 rating that has been in play since IIQ 2019. Since then, conditions have changed – to say the least. The effective closure of the business and the two-thirds drop of the company’s public stock price in one month are more than enough to cause us to downgrade Men’s Wearhouse to CCR 4, one step above non accrual.

The only BDC lender with exposure – Barings BDC (BBDC) – with $9.9mn in the 2025 Term Loan had already discounted its position by (21%) at year end 2019. Now, that syndicated loan is trading at a (41%) discount, we feel validated about our increased pessimism and the sense that BBDC will not be able to extract itself without a material realized loss. Income wise – given that this was an aggressively priced facility that dates back to 2018, the impact will be modest should the worst occur. The loan is priced at L + 325bps. At the current rock bottom level of LIBOR the loan yield is just over 4.0% all-in and earning BBDC only $0.400mn annually, or only 0.3% of the BDC’s total investment income in 2019.

Men’s Wearhouse : IIIQ 2019 Results Weaker

On December 11, 2019 Tailored Brands (TLRD), which owns Men’s Wearhouse Inc., reported third quarter 2019 results. To listen to the company’s CEO on the ensuing Conference Call – as we did – is to believe that the famous retailer with several well known brands is making progress. On the other hand, the Motley Fool’s take on reviewing the latest results was the opposite: Tailored Brand’s continues to face multiple challenges in the retail space and is “running out of time”.

The BDC Credit Reporter added Men’s Wearhouse – a subsidiary of TLRD – to the under-performing list in the IIQ 2019 and wrote our first post on September 13, 2019, rating the company CCR 3 (Watch List), shortly after the dividend was suspended. We had a look at all the results – including the 10-Q – for the latest quarter and came away confirmed in our initial skepticism and that of Motley Fool. The highlights of our concerns; sales dropping at all brands; the departure of a senior manager; huge losses to the bottom line; a declining stock price and still very high debt (given as 4.4x debt to EBITDA by management but much higher when mandatory capex is included).

The good news is that the company has plenty of liquidity thanks to undrawn secured revolver debt and some cash and no debt maturities in the short term. We are maintaining our CCR 3 rating in that there is still a decent chance the business can be turned around without a restructuring or bankruptcy. We do note, though, that since the last time we wrote the only BDC with exposure – Barings BDC (BBDC) – discounted its $10mn investment in the 2025 Term Loan by (17%), lower than in June 2019.

Men’s Wearhouse: Earnings “Mixed”. Dividend Cut.

On September 11, 2019 publicly traded Tailored Brands (ticker: TLRD) – owner of Men’s Wearhouse and other clothing businesses – reported “mixed” second quarter 2019 earnings, according to a news report . Adjusting for a special one time item, EPS is down a fifth from a year ago and sales are off 4%. Most indicative of all, the company has suspended its dividend “to pay down debt”.

There is only one BDC with exposure: Barings BDC (BBDC). We placed the senior loan on the under-performing list from the IIQ 2019, when the BDC discounted the value of the debt by (12%) from (5%) previously. BBDC’s exposure started in IIIQ 2018 and this was expected to be a super-safe loan judging by pricing (L + 325%). Annual investment income of just under $0.600mn is ultimately at risk.

The latest news is likely to cause a further unrealized write-down in the next earnings release, unless the valuation folk take comfort from the savings in cash flow to come from the dividend elimination. We note the 80% drop in TLRD’s stock price in the space of a year and we worry. The credit is rated a CCR 3 (Watch List), but could be headed lower before the year is out.