The hits just keep on coming to retailers. On August 2, 2020 Le Tote Inc. , which owns Lord & Taylor , filed for Chapter 11. As in most cases these days, this was not a surprise. Back in April the BDC Credit Reporter wrote two articles about the upstart company that had acquired the venerable but failing Lord & Taylor and tried to create a hybrid online bricks and mortar retail concept. Already then Le Tote was rated CCR 4 and was on our Weakest Links list.
To get out of its current predicament the company “will simultaneously solicit bids for a going concern sale of both its Le Tote and Lord + Taylor businesses, and conduct targeted store closing sales to maximize the value of its business“. No word on any Debtor In Possession (DIP) financing, which is worrying. There does not seem to be any “stalking horse buyer” either. The company has agreed with its lenders to use cash collateral to fund operations going forward.
From a BDC perspective, nothing has changed in terms of exposure from our earlier posts. This is likely to be a material setback for the Carlyle organization as its public and private BDCs TCG BDC (CGBD) and TCG BDC II are major lenders to the company. According to news report, Le Tote’s total debt is just $137mn and the Carlyle exposure is $27.9mn. (75% is held by the non-traded BDC). Furthermore, we’d guess the BDcs will have to recognize a substantial devaluation of their debt which was only discounted (7%), even though the debt is second lien in a business clearly headed to disaster. Judging by market conditions for retailers of every stripe and the junior position in the debt stack, this could result in a complete write-off for the two Carlyle entities. Investment income at risk is ($2.0mn) per annum.
Unless we’re much mistaken – which happens – this will be a black eye for the Carlyle Group’s BDC lending. It’s not just the amounts involved, which are relatively modest given the size of the two funds, but the very fact of choosing to lend as recently as IVQ 2019 in an industry where the word “apocalypse” is constantly being used. There’s been no discussion of this credit on CGBD’s past conference calls but the subject may get addressed when IIQ 2020 results are reviewed.
In the interim, we’ve downgraded Le Tote to CCR 5 and removed the name from our Weakest Links list (which is shrinking for all the wrong reasons). This is the second BDC-financed company to file for bankruptcy in August already and the 42nd for the year. See the BDC Credit Reporter’s Bankruptcy list.
A trade publication has written that Barnes & Noble Inc. has both closed a large store in New York City and let go an unknown number of its corporate staff. The company has been candid in recent months about the harsh impact of the Covid-19 crisis on its business.
The BDC Credit Reporter is adding the famous bookseller to the underperformers list based on the above, with a CCR 3 rating. There are only two BDCs with exposure – Carlyle Group’s public BDC TCG BDC (CGBD) and its non-traded sister BDC TCG BDC II. The exposure is in the company’s senior secured Term Loan and amounts to $34.0mn. As of March 31, 2020 the debt was discounted for the first time by (8%). Typically that’s modest enough a drop in value to keep a company on the performing list with a corporate credit rating of 2.
However, given this latest news and the continuing challenges in retail, we’re being careful and adding this debt – priced at LIBOR + 550 bps – on our underperformers Watch List. When we have access to public information that causes us to be concerned, the BDC Credit Reporter will make an independent assessment regardless of the BDC valuation which is our first port of call.
On April 27, 2020 the BDC Credit Reporter pro-actively downgraded Capstone Logistics Acquisition to a Corporate Credit Rating of 3 from a CCR of 2. Capstone is “an outsourced supply-chain-solutions provider offering freight handling services, supply-chain consulting, and management of distribution centers“. We downgraded the company, and the $128mn in BDC debt due to our concerns what the national shut-down of business activity may have had on business activity given the leveraged nature of Capstone.
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…
We’ve downgraded DTI Holdco Inc. (dba Epiq Global) to a Credit Corporate Rating of 4. The huge legal services company was first added to the Underperformers list in the IVQ 2019 with a CCR of 3. Since then, Moody’s downgraded the company in mid-March to Caa2 from B3. The ratings group was concerned about liquidity and worsening business conditions from a ransomware attack that later caused large layoffs. The traded debt of the company is now marked at a (25%) discount).
The company has over a billion dollars in debt outstanding. However, BDC exposure is modest. Ares Capital (ARCC) has invested $9.3mn, mostly in equity but also in debt. Carlyle’s TCG BDC (CGBD) and non-traded CGBD II are in the 2023 First Lien Term Loan that is being discounted by 25%. We don’t foresee any payment default any time soon, but will need watching. Should conditions in the economy – and in legal services normalize – the company is likely to recover.
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.
The BDC Credit Reporter is adding Barnes & Noble Inc. – the iconic bookseller – to the Underperformers list. We’ve noted that the company’s 2024 Term Loan is trading at around 80 cents on the dollar. Moreover, most bookstore locations are closed during Covid-19, which cannot be good for the bottom line and the ability to service debt. We are initiating the company at a Corporate Credit Rating of 3.
There are two related BDCs with exposure – recently booked – to the company: Carlyle’s TCG BDC (CGBD) and its non-traded twin CGBD II. (No one can accuse Carlyle of a fanciful BDC naming policy). As of year end 2019, total exposure – all in the 2024 Term Loan – was $34.4mn and valued at par and equally divided between the two BDCs. There is $3.1mn of investment income potentially at risk. We’ve not learned much, though, from the public record about Barnes & Noble’s financial condition, so we’ll revisit the CGBD valuation when IQ 2020 earnings are released in May.
Right up front we have to warn that the BDC Credit Reporter is playing the “name game” here. Here’s the background: Bloomberg reported on February 5, 2020 that “U.S. Dermatology Partners has defaulted on a $377 million financing provided by a group of investment firms, according to people with knowledge of the matter“. The article went on to say the debt was funded – at least in part – by BDC offshoots of Golub Capital (GBDC); Carlyle Group (CGBD) and Ares Management (ARCC). The rub ? No such company name exists in the Advantage Data records, nor even the prior name of the business: Dermatology Associates.
After much rifling through virtual files, we’ve worked out that GBDC carries its portion of the unitranche debt – which is nominally publicly traded – as Oliver Street Dermatology and has a $27.5mn investment at cost, all but $0.2mn of which is in the May 2022 unitranche loan. At September 30, 2019 that debt was discounted between (12%) and (18%). CGBD’s exposure is even bigger ($73mn) and goes under the name Derm Growth Partners III. Like ARCC, CGBD has a sliver of equity in the company ($1mn), valued at zero. The debt – in that same 2022 unitranche loan – was discounted (30%). We’ve not been able to clarify if ARCC has any exposure to the troubled company under yet another name.
What we do know is that we placed the company on the Under Performers List with a CCR 3 rating in the IQ 2019, when the equity stake was written down by CGBD by (86%), after being carried at a 45% premium the quarter before. That kind of valuation change is what draws our attention to previously performing companies.
The rating was dropped to CCR 4 when the debt – as mentioned above – was discounted (30%), compared to (13%) in the IIQ 2019. Now, with the default, we’ll be downgrading the company by whatever name to CCR 5.
We know a little about what’s ailing the privately-held company from CGBD’s last Conference Call: “We’re working through some operational and financial performance challenges with the sponsor and the company“. CGBD, though, waxed optimistic about any ultimate outcome because “this is a first lien tranche“. Still, if we read the filings right, the interest rate on the debt has been upped by 1.0% recently and was entirely on PIK through September 2019 – typical signs of credit weakness.
Now we seem to be looking at yet another “debt for equity swap” – a favored resolution in these situations amongst leveraged lenders, who move from lender to owner, or some hybrid thereof. We’ll wait for further details before drawing any grandiose conclusions but, given the $100mn of public BDC exposure to the business – owned by ABRY Partners since 2016 – this is a story worth following.
On April 16, 2019, SolAero Technologies, ” a leading provider of satellite solar power and structural solutions” , announced by press release a new financing arrangement which will cede control of the business to a new group of investors/lenders. The new group includes the Carlyle Group, GSO Capital Partners LP, First Eagle Private Credit LLC and Ares Management Corporation.
This allowed the company to restructure its debt – most of which was on non accrual. Based on a review of the IIQ 2019 10-Q, the only BDC with exposure – TCG BDC (CGBD) – seems to have booked an interim Realized Loss of ($9.1mn) and been left with $22mn of debt and equity in the restructured entity. The debt is carried at par, but we’re still keeping the company on the under-performing list with a Corporate Credit Rating of 3, till we see real improvements in the business. Solar has been a graveyard for capital and this story is only half told.
As is often the case where CGBD is concerned, none of the above was discussed on the latest (IIQ 2019) Conference Call or in any earlier communication with shareholders. Unfortunately, asset managers that have sprung out of private equity origins can be close mouthed about sharing investment details with public shareholders. It just goes against all their training. All the better for justifying the BDC Credit Reporter to our readers , so we’re not complaining.
On August 6, 2019, TCG BDC (CGBD) reported IIQ 2019 results, including placing its first lien debt to dental services chain Dimensional Dental Management on non accrual. This debt has been on the books since IQ 2016, and on the under-performing list from IIIQ 2018. We have no information from CGBD as to what’s going wrong in the PE-owned company, but a (37%) discount, up from (15%) just a quarter before, suggests a loss is more likely than not when the smoke clears. CGBD has already been deprived of $3.0mn of annualized investment income, and could yet lose some substantial portion of the $33.3mn at cost, currently valued at $20.9mn.
With the release of TCG BDC’s (CGBD) 10-Q on August 8, 2019, we see that the first lien debt held by the Carlyle BDC has been placed on non-accrual and written down on an unrealized basis by (57%). Ares Capital (ARCC), which has both first and second lien debt outstanding – also on non accrual in both case – has discounted the former by (42%) and (94%). All this augurs badly for the two BDCs. If all continues to go poorly for Indra – which owns clothes manufacturer Totes Isotoner – the second lien loan ($65mn at cost) and most of the senior debt ($25mn) could become a Realized Loss, and relatively soon. At least, this troubled debt will no longer have any income impact on either BDC going forward. Nonetheless, if things don’t turn around for Indra, these loans – on the books since 2014 – promise to be major reverses for ARCC and CGBD and for their credit underwriting track records.