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Multiple BDCs: Bluestem Brands Stalking Horse Offer Reduced

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Preamble

We’re re-publishing an article from the BDC Credit Reporter below about developments at bankrupt first wave casualty Bluestem Brands Inc., the owner of multiple retail channels.

In and of itself the news is not earth shattering and does not alter the CCR 5 rating we have for the company.

At a time when one BDC-financed company after another is filing for bankruptcy this may not seem very important.

Less

However,  we use this opportunity to illustrate that a harsh reality of recessionary environments is beginning to affect lenders: recovery expectations are dropping.

Till recently, a relatively small number of companies filed for bankruptcy or restructured.

Those who did – more often than not – retained much of their value.

That’s especially important for BDC lenders – mostly sitting high on the balance sheet – because that limits their realized capital losses when all is said and done.

With economic conditions very dire – and this has occurred in every prior recession – the salvageable value of failed companies is headed south.

This is as you’d expect with bankruptcies mounting; tighter credit conditions; coronavirus uncertainties, etc.

Consequence

As a result BDCs face a double whammy of higher defaults and receiving less back from the bankruptcy or restructuring process.

We’ve dipped into the BDC Credit Reporter’s database to quantify – as best one can – what this might mean.

The FMV to cost of companies rated CCR 3, where the risk of failure is some way away is 89%.

By the time we get to a CCR 4 rating the FMV to cost drops to 68%.

For non performing companies – those rated CCR 5 the percentage is already 51%.

Even now – and we’re mostly referencing values at March 31, 2020, BDCs will lose half their capital on failed companies.

Hypothesizing

It’s possible that with weaker conditions that recovery percentage could drop to 40% or even less.

We don’t pretend to know and we don’t have enough data to even make a guess.

We do know, though, that the BDC Credit Reporter already shows roughly $3.0bn of BDC assets invested in CCR 5 companies at FMV.

Reduce that by 20% – to a FMV to cost of 40% – and that will mean ($600mn) in higher eventual realized losses.

More To Come

These numbers will become even more meaningful if – as we expect – many more companies drop from CCR 4, but are still performing, to CCR 5 and non performing.

For the record, the BDC Credit Reporter counts $3.640bn of assets at FMV in the CCR 4 category and $7.651bn in CCR 3.

Whatever proportion of these assets that work their way down to CCR 5 – and to some sort of ultimate resolution – the additional losses from weaker recoveries than before could be in the billions. 

We’ll be keeping a close eye on other non-performers besides Bluestem for clues as to the broader trends. 


Bluestem Brands: Stalking Horse Offer Reduced

As we last wrote on March 11, 2024, Bluestem Brands is in Chapter 11. Now we hear from the Wall Street Journal that the “stalking horse” offer by Cerberus and a group of lenders to the company has been reduced from $300mn to $200mn. Further details are as yet unavailable.

The implications for the 4 BDCs with exposure – which has now increased to $34mn as the lenders provide DIP financing which is performing – are not clear. We expect the BDCs are part of the Cerberus headed attempt to undertake a debt for equity swap. Clearly market conditions have deteriorated since the bankruptcy. This might result in each lender getting a bigger equity slice of a smaller pie or cause another buyer to swoop in or delay the exit from Chapter 11, which has the effect of depleting cash resources. (Bankruptcy is a very expensive process, and this one will shortly be entering its fourth month).

The BDCs involved in the original debt have already discounted their loans by (40%) as of March 31, 2020. Given the reduced perceived value of Bluestem, this might result in a yet bigger discount as of the June 30 valuation and a bigger realized loss when this phase is completed. The $6.3mn in DIP financing, though, should continue to be unaffected for the moment. We maintain the company’s CCR 5 rating.

This drop in the value of Bluestem is emblematic of what is likely to happen to recovery values going forward. Before Covid-19 struck, bankrupt companies were – by and large – retaining much of their value given plentiful capital in the market. Now buyers, investors and lenders are all pulling out their forensic microscopes and values are dropping. We’ll be interested to compare the final discount the lenders have to absorb against the March 31 value when this transaction plays out. It will be instructive both about Bluestem Brands and about recovery expectations more generally. The BDC Credit Reporter guesses we could see a substantial further drop. This is what happens in recessions. The days of a V recovery seem far off.

@2020 BDC Credit Reporter

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