Posts for TCG BDC II

Le Tote: Files Chapter 11

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.

Barnes & Noble: Corporate Lay-Offs, NY Store Closed

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.

Le Tote: May File Bankruptcy

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:

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…

DTI Holdco Inc: Downgraded To CCR 4

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.

Barnes & Noble Inc. : Added To Underperformers

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.