We only initiated coverage on Le Tote three days ago. The virtual retailer which acquired Lord & Taylor was laying off its employees en masse as is the fashion at the moment in retail. Now, “people familiar with the matter” indicate the company with the French name and the unusual strategy (getting back into brick and mortar) is considering filing for Chapter 11. There are other alternatives, such as raising additional capital. Nine times out of ten, though, when bankruptcy is mentioned as an option, you can be pretty sure it’s the likely outcome.
This might mean a big loss – or even a complete loss – for the 3 BDCs involved. See our prior article for more of the details. The potential Biggest Loser would be Carlyle’s non-traded BDC TCG BDC II, with 75% of the exposure. Next is the public Carlyle BDC with the ticker CGBD with the remainder, as the Horizon Technology (HRZN) equity stake is non material.
We are downgrading Le Tote from CCR 3 to CCR 4 as a loss of some magnitude is now all but certain. We are also adding the company to our “Weakest Links” – those companies where a bankruptcy filing or restructuring seems imminent. They don’t last long on this list: https://airtable.com/shrwR1HMlezWPiUTH
If a Chapter 11 does occur, we will learn where the second lien lenders stand. Maybe the two Carlyle BDcs will end up with equity in a restructured Le Tote…
Le Tote Inc. is an apparel rental company that, in an unusual twist, purchased brick & mortar Lord & Taylor late in 2019. The idea then was to have both a virtual and a physical presence, and possibly end up with an initial public offering. Covid-19 has now laid those plans low and on April 1st, 2020 the company decided to close down all its physical locations. As we hear from trade reports, this included large layoffs throughout the company. Exact numbers are not known. As a result, we are adding Le Tote to the Underperformers List with a Corporate Credit Rating of 3.
The only BDCs with exposure are the TCG BDC funds (CGBD and CGBD II), which have exposure to the second lien added in 2019 to fund the Lord & Taylor acquisition; as well as Horizon Technology Finance (HRZN), which has a tiny ($63,000 at cost !) equity investment, reflecting Le Tote’s venture-background. At year-end 2019, the Carlyle CGBD/CGBD II exposure of $28mn (mostly held by the latter) was valued at par. The equity was valued at a nice premium. All of that is likely to change with sales dropping and with the about face in strategy in what was already – reportedly – a company not yet profitable.
Given that the Carlyle positions are in second lien and that anything with the word retail attached is worrisome at this time, we could be shortly downgrading Le Tote further. However, there is very little public information about the company’s financial condition, so we’ll wait to see what CGBD – and to a lesser extent – HRZN do in terms of valuation or disclosure when reporting IQ 2020 results.
We do question why Carlyle jumped at the opportunity just a few months ago to invest in the retail sector and in a strategy that – apparently – was highly controversial. We understand the many BDCs which have or had retail exposure that dated back to before the internet triggered the “apocalypse” that we’ve been living with for several years. It was hard to imagine even a few years ago that much of the way we shop – and with whom – would alter drastically. In this case, though, Carlyle added these debt positions – and in a junior position too – only in the IVQ 2019. Now $2.5mn of investment income is at risk of being interrupted or being completely lost.
We learned from a trade publication that Audacy Corporation has been sold to Australian firm Electro Optic Systems for $10mn. That’s important to the only BDC with exposure – Horizon Technology (HRZN) – which has $3.9mn invested in Audacy. That exposure is in the form of two loans (maturing in 2020 and 2022) and in common stock. As of September 30, 2019 – and as discussed in an earlier article – the debt was on non accrual and had been since the IIQ 2019. HRZN has written down its investment to $1.5mn.
We get the feeling the $10mn being received from the buyer will not cover all the debt outstanding but – given that Audacy is a private company – we don’t know for sure. We’re guided by the current market value of the two loans mentioned before, which are trading at a (58%) discount to par. Those numbers suggest that the net amount HRZN can hope to receive from the sale of Audacy is in line with the most recent valuation. If that’s true, expect to see a realized loss of ($2.4mn) booked in the IVQ 2019 or IQ 2020, but no further loss beyond what was already provided for.
We will circle round once the final outcome is known from HRZN, and will be in a better position to undertake a post-mortem on this credit that was first booked only in the IIQ 2018 and started to shows signs of trouble only months after HRZN became involved. For the BDC, this represents a loss of under $0.4mn in annual investment income – some of which will presumably be offset by proceeds from the sale of the business – and a modest realized loss equal to 1.1% of equity capital at par.
On October 29, 2019 we reviewed the public record about HRZN’s only under-performing company that we’ve identified, in advance of IIIQ 2019 earnings season: Audacy Corporation. According to its website, Audacy was launched in 2015 by a team of Stanford graduates, a SpaceX veteran, and NASA award winners. Their mission is “to deliver anytime, highly operable connectivity that advances humankind to an unparalleled age of space exploration and discovery“. Audacy is a “space communications service provider enabling continuous satellite and launch vehicle connectivity from the launchpad to the Moon. Our ground-based services are now operational and our space-based data relay network will launch in 2021″.
The BDC has $3.8mn advanced in debt and equity to the satellite communications provider at June 30, 2019. HRZN initiated exposure recently, as announced by press release on June 12, 2018, which included a 2022 Term Loan. In the IIQ 2019, HRZN increased its exposure by $0.6mn in the form of a 2020 loan. Both loans are priced at LIBOR + 790 bps, and both are on non-accrual. HRZN values the investment at $1.5mn, but we placed the company on our under-performing list in the IQ 2019, when the investment was first written down.
Unfortunately, we found very little public information about the company’s performance, or the reasons for the non-accrual ,in the public record. However, both the 2020 and 2022 loans are institutionally traded and priced at a (60%) discount to cost, only slightly below the June 2019 valuation. This suggests there will be little change in the credit when HRZN reports third quarter 2019 results. We’ll be looking for a little more color as to what has gone wrong and what to expect.
Update: Following the HRZN IIIQ 2019 earnings release on October 30, 2019, no change in the value of Audacy.