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Charlotte Russe, Inc.

Store Chain: Peek Kids
Women's Retailer

"Charlotte Russe, Inc. provides specialty stores and online retailing services for casual apparel and accessories, catering to young women in the United States. The company also provides products for girls and babies. It offers shoes including boots, heels, flats, sneakers, and sandals; dresses including casual dresses, party dresses, and jumpsuits; tops, sweaters, and shirts; jeans, skirts, pants, shorts, leggings, and bottoms; plus size clothing and outerwear; accessories including jewelry, necklaces, earrings, bracelets, and rings; bags, wallets, scarves, socks, and hats; and special occasion apparel such as weddings. The company was founded in 1975 and is based in San Diego, California. Charlotte Russe, Inc. operates as a subsidiary of Charlotte Russe Holding, Inc. On February 3, Charlotte Russe, Inc. filed a voluntary petition for reorganization under Chapter 11 in the US Bankruptcy Court for the District of Delaware. It is in joint administration with Charlotte Russe Holding, Inc". - Bloomberg

Corporate Highlights

4/3/2019: Trade publication reports flagship assets sold to different entities, Peek Kids stores closed. More details here.

3/7/2019: Company to close all stores, liquidate all assets, according to CNN.

SB360, which describes itself as "one of the oldest, most experienced companies in the country conducting store closing and going out of business sales," announced Charlotte Russe would start going out of business sales at all stores as of Thursday. The company will accept gift cards through March 21, and it will close all of its stores by of the end of April... Charlotte Russe had 8,700 employees at the time of the filing, all but 1,400 of whom were part-time workers. It had stores in every US state except Alaska at the time of its bankruptcy filing. It also owned 10 children's clothing stores under the Peek brand, which it acquired in 2016.

2/4/2019: Company files for bankruptcy. Receives $50mn DIP financing from lenders, according to CNN.

The sale of the Company assets  to the liquidation company SB360 Capital Partners LLC was approved  at a court hearing in Delaware, according to USA Today.

2018: Reached a deal to reduce its debt from $214 million to $90 million.

2018: Despite the restructuring, sales plunged from $928 million in 2017 to $795 million.

Comparable store sales fell 11.7% during the third quarter of 2018, according to data from Moodys.

2009:  Private equity firm Advent International bought Charlotte Russe in a $380 million cash-for-stock deal.

BDC Credit Reporter View

4/4/2019: With liquidation underway, even the $10.6mn of remaining fair market value at 12/31/2019 may be too great. The total loss could reach as high as a total write-off given that there might be an asset based lender above where the BDC exposure stands and proceeds from liquidations may be modest once all costs are weighed in. We project Realized Losses of $35mn-$42mn, with FSK absorbing 50% and MAIN and its sister fund Hms Income splitting the rest relatively evenly. The same applies to investment income lost from the non performing status of the loss, which is approximately $2.0mn.

For all the BDCs involved this represents a material set-back. With the benefit of hindsight, the BDC Credit Reporter is disappointed that as recently as IIIQ 2018 MAIN and Hms Income were still valuing their equity stake at full value ! At the same time, the debt was being discounted by (11%), which does not make valuation sense. Corporate Capital Trust, whose position was absorbed into FSK, proved more conservative about its valuation practice. Moreover, transparency to shareholders left to be desired. Our review of the filings - aided by Sentieo's ability to scan all documents from the initiation of the exposure as early as 2013  - shows no Conference Call discussion of this difficult credit even though the Company has filed for bankruptcy twice. The first time the BDCs involved agreed to a debt for equity swap, in and of itself a notable event. Finally, the failure of the original lenders to "save" the Company with a debt for equity swap and taking control begs the perennial question if creditors should seek to "turn around" under-performing companies in this way. We don't know if the lenders - including the BDCs involved - deliberately chose this path in 2017 or had no viable alternative and would have ended up in the same place as today anyway.

Highlights

Currently, there are 3 BDCs with debt and exposure to the Company, amounting to $41.7mn: FSK, MAIN and non-traded HMS Income. At December 31, 2018 only FSK appears to have placed its senior secured debt position on non accrual. However, the exposure has been sharply written down. The equity is at zero, and the debt has been discounted between 50% (MAIN,HMS) and 62% (FSK).

BDC exposure began in 2013. By IIQ 2014, the current BDC lenders were all in place with $28.3mn of first lien debt exposure due in 2019. From late 2015, Company performance - and debt valuation - began to deteriorate. In late 2017 the debt - which had increased to $54mn - was non performing. The Company filed for bankruptcy and was restructured, with the lenders exchanging some debt for equity and entering into a new $24mn debt facility with a 2023 maturity and $18mn of the prior debt converted to equity. We are not yet clear if the differential in outstandings is due to repayment of a portion of the debt at the time of the 2017 restructuring or a partial Realized Loss incurred.