January 24, 2023
Well, we all knew this was coming since mattress manufacturer Serta Simmons Bedding LLC announced a few days ago its decision not to make a scheduled interest payment on its debt. See our article at the time. We got the message and downgraded the company to non-performing status - CCR 5 on our 5-point scale. Now we hear that Serta has officially filed for Chapter 11 bankruptcy as of January 23, 2023, armed with a Restructuring Support Agreement (RSA) agreed with most of its many lenders (who have $1.9bn in debt invested) and investors:
The Restructuring Support Agreement has been agreed to by approximately 81% of the company’s first lien, first out priority term loan lenders and approximately 77% of its first lien, second out priority term loan lenders (collectively, the “consenting creditors”), as well as a majority of SSB’s existing equity holders (the “consenting equity”).
This means Serta is likely not to spend too long in bankruptcy. The centerpiece of the RSA is that lenders have agreed to reduce the total debt load by about 85% to $300mn! That's a huge write-off and is probably associated with some sort of debt-for-equity swap. In addition - and good news for the company's employees and customers, Serta is getting a $125mn debtor-in-possession financing to go with its $170mn of cash still remaining.
In that $1.9bn of debt, there is $12.4mn of BDC exposure, held by two related Barings entities: publicly-traded Barings BDC (BBDC) and non-traded Barings Capital Investment. BBDC has the greatest share: $10.6mn at cost and $8.9mn at FMV. Both BDCs are invested in second-lien debt to the tune of $5.2mn, discounted (45%) as of last September. We project all that debt will be written off as part of the RSA. BBDC also has $7.2mn in a first lien position, valued most recently at only a (2%) discount. We cannot say at this time if BBDC gets out whole or not. Given the huge debt haircut, maybe not.
The final outcome will probably be decided soon as the court settles a number of disputes between various parties that date back to 2020 as well as this bankruptcy. We might get a clear picture when BBDC reports IQ 2023 results. Management may speak to the issue shortly on their IVQ 2022 conference call. For the public BDC - which held most of the Barings position - this is a credit reverse. The good news - as we just said in an earlier article about BBDC and Learfield Communications - is that management has a policy of taking small positions in the loans on their books. As a result, the damage to income and book value will be modest.
By the way, this is the third bankruptcy of a BDC-financed company this year. We're trying to track this metric if we can. First, there was Interior Define, which was effectively involved in a bankruptcy-like process, followed by Tricida, a pharmaceutical company. We're also tracking which companies may follow in the footsteps of Serta et. al. Unfortunately if we're seeing clearly, there are several more bankruptcies coming.
Over in the much bigger universe of non-BDC financed companies, the number of filings in 2023 is much higher and getting ever worse. Are we tipping over into an above-average level of companies getting into trouble? It's hard to tell, but by the end of the first quarter, the data might speak for itself.