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Main Street Capital: Portfolio Company Assets Acquired Out Of Bankruptcy

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Preamble

Never give up !

That seems to be the motto of Main Street Capital (MAIN) where portfolio company Barfly Ventures LLC is concerned.

The restaurant company was forced to file for bankruptcy in June of this year, brought down by the impact of Covid-19 on the business.

MAIN – and sister BDC HMS Income – wrote down their debt and equity stake in Barfly to virtually nothing.

Most of the time that would be the end of the chapter.

In this case, though, the BDCs and a private equity group stepped in and bought back the assets of the bankrupt company and are going to have a second go at making things work.

The key details are in the BDC Credit Reporter article re-published below.

The BDC Reporter brings this episode to readers attention – both MAIN shareholders and BDC investors more generally – as a reminder of how many different tools these lenders have when things go wrong.

In this case MAIN is putting more money to work and helping to turn around the business for what might be a substantial equity upside.

Of course, as we gloomily point out in the Credit Reporter article, that may not work out.

Still, this example illustrates how a BDC can be a lender; an investor and a turnaround firm in the very same firm.

That makes evaluating ultimate value very difficult but also allows for the possibility of recouping capital seemingly lost forever when the initial bankruptcy occurred.


BarFly Ventures LLC: Assets Acquired Out Of Bankruptcy

After filing for Chapter 11 bankruptcy in June as a result of COVID-19 pandemic-related challenges, Grand Rapids, Mich.-based BarFly Ventures LLC sold its assets — including craft beer bar/restaurant HopCat, Stella’s Lounge, and Grand Rapids Brewing Co. — to Congruent Investment Partners and Main Street Capital for $17.5 million, the company announced on Tuesday. Longtime investors Congruent Investment and Main Street Capital formed a new operating company, Project BarFly LLC upon acquisition of the brands“. Nation’s Restaurant News

Apparently, the new owners want to revive the existing Michigan operations of the restaurant chain, and expand beyond the state.

Main Street Capital (MAIN) – as well its sister non traded HMS Income -have a long standing relationship with the predecessor company that dates back to 2015. From the IQ 2020, though, the two BDCs debt to the company was placed on non accrual and a Chapter 11 bankruptcy followed in June. As of the most recent results at mid year, the two BDCs had invested $15.0mn in debt and equity, but had written down the positions to just $1.7mn.

Back in June, the BDC Credit Reporter asked itself the following:

Will MAIN/HMS seek to take an ownership situation and – maybe – double down with some additional financing ? Or will the BDCs kick themselves for having invested in the restaurant business in the first place and with a growth strategy – as the CEO himself tells it – based on growth by debt-funded acquisitions. The model was already in trouble before Covid-19 came along but the impact of the virus was the equivalent of a body slam. You can’t win them all, but this investment seems to have been dubious from the start“.

Now we have our answer but just how this will flow from a realized loss point of view and how much new capital will be advanced by the BDCs remains unclear. Furthermore, years are likely to pass before we’ll be able to tell if this latest transaction was a genius move that might return all the monies invested and more, or will end up itself in bankruptcy court and a further loss. If nothing else, though, this transaction does underscore how some BDCs are serving as their own “distressed assets” investors and are willing to become owners in certain situations rather than just take a loss and walk away. For shareholders in these BDCs this requires a different set of lenses when evaluating a portfolio and its outlook.

@2020 BDC Credit Reporter

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