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Z Gallerie: Files Chapter 11

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Another one bites the dust. Furniture and furnishings retailer Z Gallerie has filed for Chapter 11 for the second time. The first time was in 2009. This time the company is said to have $138mn of debt and very little cash before the filing. However, Z Gallerie is not ready to gently into that dark night. Management is planning on closing 17 of 76 stores, and with the aid of $28mn in debtor-in-possession financing (“DIP”) emerging from Chapter 11 within 4 months. The only public BDC with exposure appears to be FS KKR Capital (FSK), which has been a lender since 2014, and closed 2018 with $30.2mn in senior secured debt that had been written down to $11.3mn at fair market. The loan has been on non-accrual since the IIQ 2018.  What’s not clear is whether FSK will play any part in the restructuring of Z Gallerie going forward. The new CEO of the firm said:

“Convincing third parties of the turnaround story in a short period of time — and convincing them to work with the debtors towards the value maximizing outcome preferred by the debtors — will determine whether Z Gallerie survives,” Interim Chief Executive Officer Mark Weinsten wrote in the bankruptcy filing”.

That sounds like negotiations are still underway between lenders and the company and liquidation could yet happen. Z Gallerie, though, insists there is a viable business worth saving. For FSK, this means no income will be generated from this investment for some time, if at all. Moreover – as is often the case in debt for equity swaps – the former lenders-now-owners may have to advance further funds to protect themselves from a much bigger write-off. We don’t know enough to say which way the Z Gallerie bankruptcy will go, but this seems like a definite setback for FSK, which inherited this investment from Corporate Capital Trust, and only went off the rails early in 2018, judging by the valuations. (By the way, non-traded Sierra Income – sister BDC to Medley Capital – had $4.5mn of senior secured exposure at 9/30/2018. Sierra has not yet reported IVQ 2018 results). If a liquidation is to occur, that outcome will likely happen in a relatively short period.  However, if Z Gallerie is able to dodge that bullet, FSK (and Sierra Income) may still be involved in the business in some way for some time to come.

Update: Ran into this interesting article which provides a history of Z Gallerie and its ownership and discusses why the business may have gotten into trouble.

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