Two of Sur La Table’s publicly traded creditors have signaled increased doubts the Seattle-based kitchenware retailer will repay more than $31 million in senior debt, suggesting the operator of 130 stores is in financial peril in the wake of coronavirus lockdowns around the nation.
The two creditors slashed their combined valuation of the debt by more than a third in regulatory filings last month. The moves lend credence to a May 1 report by Bloomberg News that Sur La Table, owned by the private equity firm Investcorp, is headed for a bankruptcy reorganization or sale.
The sharp write-downs for the quarter ended March 31 indicate that their confidence in being repaid “has fallen dramatically,” said Thomas Gilbert, who teaches finance at the University of Washington’s Foster School of Business.
BlackRock Capital Investment, a publicly traded unit of the well-known investment giant, reported after the quarter’s end that its $21 million investment in Sur La Table debt now has an estimated “fair value” of only $13.86 million, a 34% cut. A smaller investment company, Capitala Finance, slashed its valuation of the debt securities by 41%, writing down its $10.5 million to less than $6.2 million.
Sur La Table, launched from a Pike Place Market store in 1972, now runs mostly mall-based locations across the country, including 85 that offer cooking classes, as well as an online business. It temporarily closed its retail outlets March 20 as many states issued stay-home orders, and said last week on its blog that it would begin to reopen some “in select locations where permitted by government order.”
Investcorp, a Bahrain-based company, acquired Sur La Table in 2011, when it had 86 stores. It paid $146 million, according to Bloomberg.
The company did not respond to a request for comment on the write-downs, and it has not commented on the Bloomberg report.
The two investment firms hold what they described as “senior secured loans” or “first lien debt,” both terms that mean their claims rank high in the pecking order of who gets paid by a debtor. Gilbert said they likely have some visibility into the finances of Sur La Table, which does not publicly disclose its numbers because it is privately owned.
“If they’ve written down the fair value by that much, it must mean that the numbers that they’ve been provided by Sur La Table must be really, really bad, such that their perceived likelihood of being repaid has gone down quite dramatically,” he said. “That two of them have written down by such large amounts is telling you that they are quite convinced.”
Sur La Table’s total debt is not known. BlackRock and Capitala are the only two public companies that reported owning its debt, according to a search of Securities and Exchange Commission filings in the Kaleidoscope database.
Those investment firms must report to their shareholders what the equity and debt securities they’ve acquired are worth each quarter. In the case of private debt such as Sur La Table’s, the value is a subjective assessment based on the investor’s own guidelines.
But there’s no incentive for such investors to overstate their downgrades in such estimates. “Blackrock is telling their investors we made a poor investment,” Gilbert said.
He added that such valuation changes typically would not be done on the basis of a single week or month of poor performance. “This has the signal of permanence, ” he said. “This is not a short-term shock.”
A handful of well-known retailers hit by the coronavirus lockdown have already fallen into Chapter 11 bankruptcy reorganization, among them Neiman Marcus on May 7, J. Crew on May 4 and True Religion in mid-April.
Retail analysts say, however, that the pandemic has hurt most deeply those retailers that were already on shaky financial ground. Stronger retailers, for instance Nordstrom, have been able to borrow enough to keep running in limited form until shoppers can return to the aisles.