Email us with questions or comments: support@bdcreporter.com           α

Z Gallerie: Files Chapter 11

BDCs:
Premium Free

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.

Already a Member? Log In

Register for the BDC Reporter

The BDC Reporter has been writing about the changing Business Development Company landscape for a decade. We’ve become the leading publication on the BDC industry, with several thousand readers every month. We offer a broad range of free articles like this one, brought to you by an industry veteran and professional investor with 30 years of leveraged finance experience. All you have to do is register, so we can learn a little more about you and your interests. Registration will take only a few seconds.

Sign Up