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Clover Technologies/4L Holdings: To File For Bankruptcy

Posted on December 17, 2019

BDCs: BDCAX, ICMB

Clover Technologies Group LLC, which does business as 4L Holdings (the “world’s largest collector of used printer cartridges”) is filing for a pre-packaged Chapter 11 bankruptcy, but not before selling one of its subsidiaries – Clover Imaging – to its management and Norwest Group, according to a trade publication.

According to a December 11, 2019 press release from the company, the envisaged restructuring is radical. Essentially all outstanding long term debt will be converted into equity in a classic “debt for equity” swap; eliminating a reported $644mn of borrowings. There’s more to the deal including that Clover Imaging sale and the concurrent acquisition on December 4 by a Clover Technologies subsidiary of a company called Teleplan.

Given that the bankruptcy is pre-packaged and apparently non-controversial, the company expects only a brief stay under court protection and to continue operating normally. Some international subsidiaries of this large business with 18,000 employees won’t even be included in the bankruptcy. Chances are Clover Technologies will be back operating normally – but with a very different balance sheet – in a few weeks. We’ve seen some very fast bankruptcy resolutions, so that’s just an estimate taking into account the holiday season.

“Kirkland & Ellis LLP is serving as 4L’s legal counsel, Jefferies LLC is serving as its financial advisor and Alvarez & Marsal is serving as restructuring advisor.  Gibson, Dunn & Crutcher LLP is acting as legal counsel for the ad hoc group of term loan lenders and Greenhill & Co. is acting as its financial advisor.”

There are two BDCs with $22.3mn of debt exposure to the company: non-listed Business Development Corporation of America and Investcorp Credit Management (ICMB) in a roughly 55/45 split. Advantage Data records show exposure dating back to 2012-2013. At the moment both BDCs own the company’s 2020 Term Loan, which is publicly traded. From a valuation standpoint, the company did not appear on our under-performing list till the IIQ 2019. As of the IIIQ 2019 ICMB was discounting its position by (38%), BDCA by (46%). Currently, the debt trades at (46%) off, suggesting ICMB will have to write down its position slightly.

Going forward, the most impactful element will be the permanent loss of investment income that amounts to about $1.4mn annually. There will be a realized loss involved as well which should show up in the IVQ 2019 or the first quarter of 2020.

The good news is that – given the absence of leverage – Clover Technologies may drop off the under-performing list in 2020 if the radical balance sheet changes causes the equity to trade at par or higher.

© BDC Investment Advisors, LLC 2016 – 2019

 


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