On Monday December 11, 2017 women’s accessories retailer Charming Charlie filed for voluntary relief from its creditors, or Chapter 11.  The BDC Reporter had warned of a likely Chapter 11 filing a few days ago. The Company hopes to use the court protection to restructure its balance sheet and shrink down the number of stores in the chain, many of which are based in malls.  In a press release the Company announced both having arranged a $20mn Debtor-in-Possession (“DIP”) financing, and an asset-based loan for another $35mn. In both cases, the institutions providing the $55mn in new financing appear to be drawn from the ranks of the multiple lenders involved in the Company’s $150mn Term Loan. The bankruptcy – aimed as much at its mall store lessors as anyone else – was consensually arrived at with most of the Company’s major creditors according to news reports.

“Our goal is to move through this process quickly and emerge as a stronger, more focused organization that is better positioned to succeed in the rapidly changing retail environment,” interim CEO Lana Krauter said in a statement.

IMPACT ON BDC LENDERS

In our prior post, we already mentioned that BDC exposure at September 30, 2017 was $38.7mn, spread out across 4 different publicly traded and non-traded funds, with TCRD as the largest player with nearly one-third of the exposure. See the screenshot table below from Advantage Data, our go-to-source for a snapshot on up to date BDC outstandings. just a subscription and a few clicks away.

Although details are not available, should the BDCs mentioned above have participated on a pro-rata basis in the two new facilities, aggregate exposure may have increased by another $12mn in the two new facilities mentioned above.

OUTLOOK

We reviewed the Company’s bankruptcy page and available public information, but found little new except that assets and liabilities are valued in a range between $100mn-$500mn.  However, judging from what we know, all the Term Loan debt – where BDC exposure at 9/30 was exclusively located – will on non-accrual (if that wasn’t already the case) for an indefinite period. Judging by how other retail bankruptcies have gone, the interruption of income is likely to last between 6-9 months. Holding up a quick resolution will be the likely opposition of mall lessors as the Company seeks to shutter 100 locations, or even more.

Based on the comments made by management in the press release announcing the bankruptcy – and speculation by others prior to this news – the final restructuring is likely to include the conversion of some – or even all- the $175mn Term Loan into equity in the former high flying firm. We wonder if Charming Charlie’s founder and majority owner Charlie Chanaratsopon will be able to retain any stake in the business post-restructuring ? An existing $60mn Revolver, plus the new asset-based loan and even the DIP converted into a permanent facility might be the only debt remaining at the Company once the dust has cleared.

The fair market value of the Term Loan is currently 50% of cost in the publicly traded debt market, according to yet another useful feature from Advantage Data. This suggests the current discounts by BDC lenders on their Charming Charlie exposure may have to be tripled or more, given that at September 30 the discounts to cost were between 13%-19%.

The immediate impact will be on the investment income of the BDC lenders. With the Term Loan priced at LIBOR + 8.00%, the income forgone should annualize at around $3.2mn. A portion may be offset by any new advances made  – on a more secured basis – in the DIP and Revolver debt. After a restructuring is agreed – and assuming the Chapter 11 does not shift into a Chapter 7 as occurred at Sports Authority – some or all the income loss will be made permanent by whatever “debt for equity” deal is agreed upon. The BDC lenders involved are likely to both  reduce their debt and take some sort of Realized Loss even if receiving an equity stake in the restructured company.

Not to be the voice of doom, but from what we’ve read – and leaning heavily on insights from Moody‘s which has access to the Company’s financial statements – there must be some doubt about the long term viability of Charming Charlie’s business. The reduction in its debt load will be helpful, but – as Moody’s confirms – the business was never as heavily leveraged as many others. Furthermore, Charming Charlie faces the well known but undeniable headwinds from the changes going on in how we shop. With its principal presence in malls, the Company has a major challenge to overcome and will need to find new ways to reach out to its principally female customer base, who are taking in ever greater numbers to shop online. Even back in 2015,when the BDC Reporter first noted deterioration at the Company, same store sales were already in decline – and falling fast. All the growth in total sales which the Company enjoyed in recent years was from opening new stores.

Even if and when Charming Charlie emerges from bankruptcy, the BDC Reporter will be keeping the restructured company – with its likely BDC lenders/owners – on our Watch List for some time.