Multiple BDCs: Bluestem Brands Stalking Horse Offer ReducedPremium Free
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.
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.
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.
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.
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